What to expect from the ECB

Silvia Dall’Angelo, senior economist at Hermes Investment Management, tells IGTV that while this week’s European Central Bank decision is largely a non-event, the key risks for the eurozone economy right now still stem from Italy.

The European Central Bank (ECB) is widely expected to keep interest rates on hold at the Governing Council’s monetary policy meeting in Frankfurt on Thursday.

More important to investors will be the press conference that follows the decision, where ECB President Mario Draghi is likely to field questions on European monetary policy, Italy’s budget standoff with the European Union, the outlook for growth and inflation, as well as risks around ongoing global trade tensions.

While the ECB meeting this Thursday will be 'fairly uneventful', the main risk around this week’s meeting is 'probably more pertinent to what’s happening in Italy', Silvia Dall’Angelo, senior economist at Hermes Investment Management, tells IGTV.

From quantitative easing to quantitative tightening

The ECB is expected to put an end to its €2.6 trillion asset purchase programme in December, with tapering already in full swing.

In January, the central bank cut its bond buying stimulus in half to €30 billion per month and slashed its quantitative easing once again this October to €15 billion per month. However, the ECB has said previously that it will still keep rates low 'through the summer' of 2019.

Many analysts expect the ECB’s first rate hike since 2011 to come in autumn 2019. 'However, if things turn sour, they could delay, or signal a delay, in the first rate hike and signal a very shallow path for the policy rate after lift off,' says Dall’Angelo.

Disappointing inflation

Annual core inflation in the eurozone hit 0.9% in September, falling short of analysts’ expectations and sharply below the ECB’s target of 2%. The ECB is likely to acknowledge that inflation 'has been on the soft side', says Dall’Angelo.

However, 'forward looking indicators for inflation have remained quite solid', pointing to wages which she says are 'on a gradual rise' along with the unemployment rate which inched down to 8.1% in August marking the lowest jobless rate since November 2008. 'At this stage the ECB will maintain its confidence that inflation will converge towards its target in the medium term.'

The next ECB president

Draghi will end his term as ECB president in October 2019, raising questions about who will become his successor. Dall’Angelo tells IGTV the two current frontrunners are the former head of the Finnish central bank Erkki Liikanen and the Banque de France governor François Villeroy de Galhau.

However, she says 'the race is still wide open' and more clarity will be given next May after the European parliamentary elections and after the next European Commission president is announced.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.