Mario Draghi Could "Step Up Dovish Rhetoric" at January's ECB Meeting Say ABN Amro

ABN Amro's macro team have increased the dovishness of their ECB forecasts, as they now expect the central bank to announce more QE in 2016, a move which would weigh heavily on the euro.

The head of ABN Amro’s macro research department, Nick Kounis, says he now expects the ECB to reduce deposit rates by a total of 20 basis points and increase QE by 10bn more asset purchases per month in 2016. 

Previously the bank’s official line had been for only a single 10 bps cut, however, falling inflation expectations have led them to revise their view:

“We think ECB President Mario Draghi will step up the dovish rhetoric at Thursday’s meeting and hint that further action may follow before long.

"Our base case is that the ECB will announce additional monetary stimulus in March. 

“Indeed, we already expected a further 10bp reduction in the deposit rate.

“We now also think that the ECB will couple this with a EUR 10bn increase in monthly asset purchases. “

The bank also sees a further cut to the rate happening in June, taking it to -0.5% by the middle of the year.

Their main reason for the extra easing is deteriorating inflation expectations:

“Since the December ECB meeting the inflation outlook has deteriorated.

“Inflation is likely to dip back into negative territory over the next few months.

“This partly reflects the ongoing sharp fall in oil prices, with Brent falling through the USD 30 per barrel level.

“Our base case is for a gradual recovery during the course of the year, but this would still see the drag from oil prices on annual inflation intensifying in the coming months.”

A further reason is a negative fall in core inflation caused by the “second round effects” of falling oil prices, which, “on items within the CPI, which have a strong link with energy.”

Another reason is that growth in the euro-zone will moderate, although the bank concedes that it will continue, nevertheless.

Kounis expects the ECB to make a sharp downward revision to its inflation projections for 2016, bringing them “close to zero”, whilst also seeing a not immaterial chance of the ECB surprising market-matchers and raising rates at their January meeting.

Nevertheless, on balance he sees the ECB staying on hold, as a result of its broad church of opinion, which means decisions take longer to reach a consensus:

“The Governing Council has not been able to react decisively to events over recent months due to splits in opinion about whether action is necessary and/or what policy measures to take.

“So it seems likely that the ECB will need more time to assess, form a consensus and decide what to do.”