The European Central Bank is set to unveil a major stimulus package Thursday in Frankfurt, with investors pricing in a possible re-start of the bank's quantitative easing program, and deeper negative interest rates, in a final attempt from President Mario Draghi to ignite growth and inflation in the region's moribund economy.
Draghi, who closes his eight-year term as ECB President next week, had hoped to end his tenure in Frankfurt with a modest rate increase, even guiding markets towards such a move at the end of last year. However, the ongoing trade war between Washington and Beijing, Brexit uncertainty and myriad political challenges in the single currency area have pinned down growth prospects and raised new deflation risks as its biggest economy -- Germany -- flirts with potential recession.
The ECB will look to address the impact of those, and many other factors, later today in Frankfurt with a possible lowering of the rate it charges lenders to hold money in the Bank's overnight deposit facility -- which currently sits at -0.4% -- and a commitment to keeping base lending rates at or near zero percent for an extended period of time. The Bank may also re-start its controversial quantitative easing program, which has been been dormant since December of last year after hoovering up nearly $3 trillion in government, agency and corporate bonds since its launch in March of 2015.
"More than ever, details matter as much as the headline measures," said ING's chief EMEA strategist Petr Krpata. "Nevertheless, the key variable to look out for in Thursday's policy announcement is whether asset purchases are restarted."
"We think market expectations are still skewed towards a fairly aggressive QE programme so any signs that the General Council's preference is shifting towards rate cuts/ guidance, or towards suppressing credit spreads rather than outright rates, would all be negative for long-end swap rates and EGB yields," he added.
The euro was marked at 1.1017 against the U.S. dollar prior to the ECB meeting in Frankfurt, while benchmark 10-year German bund yields, a proxy for risk-free borrowing rates in the currency area, were seen trading at -0.58%.
Should Draghi deliver on both a QE re-start (estimates vary, but the Street consensus suggests the ECB could buy as much as €40 million in new paper each month) and deeper negative rates, the downside move in the euro, and the subsequent gain for the U.S. dollar, are likely to raise the ire of President Donald Trump.
Trump called out Draghi in a pair of Tweets earlier this spring, calling his signals of potential stimulus "very unfair to the United States" and equating the easing options with currency manipulation.
The President has since repeated his view that the U.S. dollar is "too strong" on many occasions, and has persistently pressured Federal Reserve Chairman Jerome Powell to lower interest rates in order to match easing moves from other central banks around the world.
....The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn't allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of "Boneheads."— Donald J. Trump (@realDonaldTrump) September 11, 2019
However, much of of the market risk from today's rate decision, however, is linked to the potential for disappointment from Draghi's final throw of the dice, with some investors concerned he may balk at re-starting QE amid pushback from colleagues on the 25-member rate-setting Governing Council. He may also wish to keep policy options open for his successor, IMF Managing Director Christine Lagarde, who takes over from Draghi at the end of October.
"Over his eight-year term, Draghi has on many occasions provided a presentational masterclass, easing markets' concerns and calming the mood whether actions have been undertaken or not," said Stewart Robertson, senior economist at Aviva Investors. "But he has not been perfect - there have been times when the market reaction has not been what the ECB would have wanted."
"It is likely that these have been those times when there have been stark differences of view among ECB members and when Draghi has attempted to find a convincing and credible middle ground," he added. "Most of the time he has achieved this and he has improved over the years. But it is no secret that there are once again a range of views across the ECB council. His last meeting will be watched closely to see if he can pull it off for the final time."