ECB might be playing the patience game. Not sure the markets will appreciate, especially after the sharp rebound over the last 2-3 weeks…
From Bank of America Merrill Lynch FIC strategists:
« No new measures
The ECB surprised markets in September but its message was lost in translation in October. The skepticism generated after the October meeting, together with weak August hard data and inflation expectations still well below pre-Jackson Hole levels, have created speculation on whether further moves are imminent.
We still believe that data needs to get worse, particularly for inflation, for the ECB to develop a sense of urgency and ease policies further. Hence, we do not expect new measures at this week’s meeting. Mario Draghi is likely to insist on the fact that the Governing Council is unanimously prepared to take unconventional measures, within the ECB’s mandate, if it has to counter risks of a prolonged period of low inflation. However, communication challenges keep building up and, while he will try to address these, the last meeting taught us that it will not be easy. »
Yet, Merrill still expects QE to happen sometime around mid-2015.
« We see sovereign QE as unavoidable in our central scenario for the ECB. We believe that the existing package of ECB measures is unlikely to have a notable impact on the economy beyond weakening the Euro, in the absence of changes in the regulatory treatment of ABS mezzanine tranches or a guarantee programme. We therefore expect the economic recovery and inflation profile to continue surprising the ECB on the downside.
Indeed, the latest bank lending survey corroborates this view. The improvement in credit standards are still lagging for SMEs relative to large corporates. Increased loan demand by NFCs is not associated with investment, but is mostly driven by M&A activity, debt restructuring, inventories, and working capital. This is consistent with a sluggish recovery and highlight the risks of investment failing to pick up substantially. Meanwhile, we expect the TLTROs to help rollover existing loans at better rates, but not drive much the provision of new loans. »