ECB July 2019 Meeting Preview – Will Draghi surprise with a rate cut?


The common thinking in markets ahead of European Central Bank (ECB) Meeting is that post dovish comments at Sintra, Portugal last month, Draghi will signal a rate cut move today and then act in September. The market is pricing in a 39% chance of an ECB rate cut today. 

The traditional call is to wait for more staff forecasts, along with release of 2Q GDP in mid-August but it’s a close one. The fresh speculation in this week with a rate cut in July meeting stem from weak PMIs across the board. Germany in particular had a manufacturing PMI hit a 7-year low. Greater issue on hand is that the soft data isn’t a one-off. The GDP growth is likely to have slowed to around 0.2%% q/q in 2Q19 (from 0.4%) and expected to remain broadly steady in 2H19, somewhat weaker than the ECB’s projections by June. 

As long as trade tensions continue to prevail and Chinese demand (imports) is seen slowing down further, the outlook for Europe will remain suspect at best. But with worries about Germany falling into a recession now gaining traction, there is good reason for the ECB to start acting as early as tomorrow to try and get ahead of the curve.  The problem with waiting is that "disappointment" from not acting tomorrow may see markets throw a fit and risk the possibility of inflation expectations tumbling again. 

In the timeframe of 6months, it won’t be much of a problem whether they effectively pre-announce the cut in July meeting or actually cut in September. The communication, as always with Draghi, is the key. If he is dovish even if they hint at cutting and expects more action, then Euro downside will be open. 

In any case we expect ECB’s to start easing cycle by cutting deposit rate by 10 basis points to a record-low minus 0.5% and followed by another cut by year-end. At this time, we do NOT expect ECB to restart its asset purchase program, although we acknowledge the risks have risen in recent weeks as the Eurozone economy continues to underwhelm. As much as the ECB would like to avoid QE, they have but little choice except to restart this. The main problem is that ECB is approaching the purchase limit for certain countries already so it remains to be seen how effective this step would be if they cannot raise the issuer limit. It will be a tight call tonight!


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