Someone said reduced rate? Five questions to the ECB

LONDON (Reuters) – After weeks of speculation on lower interest rates and badet purchases, investors hope the European Central Bank meeting will announce the clearest signal on Thursday. imminent relaxation of the policy, if it is the details.

ECB President Mario Draghi announced last month a new easing to combat stubbornly low inflation. Policy makers have supported his call.

With the trade war against eurozone exporters and the US Federal Reserve expected to lower US rates at its meeting on July 30-31, the markets expect the ECB to cut rates in September.

Here are five key questions on the radar for the ECB meeting this week:

1. What can we expect on Thursday?

Economists polled by Reuters are waiting for the ECB to modify its easing forecasts this week and reduce the deposit rate in September.

"In response to low growth and still under control, the ECB will probably adjust its forecasts in July and promise to keep current or lower rates instead of current levels," Berenberg economist Florian Hense said. .

Bond markets, also positioned for a cut in September, are likely to trigger a crisis if this is not the case.

The yield on 10-year German bonds this month briefly fell below the ECB's deposit rate for the first time, a further sign that investors are banking on lower rates.

For an interactive version of the table below, click here. Tmsnrt.rs/2YtKj7d.

(GRAPHIC: Bund performance should fall below ECB deposit rate – tmsnrt.rs/2YqE2cu)

2 – So, a July rate cut is out of place?

Waiting until September to lower rates, gives the ECB additional time to put in place a package of easing measures, badysts say. The latest economic forecasts from the ECB are also expected for this month and the bank tends to make big changes with these updates.

UBS expects the ECB to announce a 10 basis point rate cut in September, along with a staggered deposit rate, to ease the pressure of negative rates on banks.

But do not rule out a July surprise. The ECB may want to anticipate a Fed rate cut that will weigh on the dollar and strengthen the euro, hurting exporters and weighing on inflation.

Fighting against the strength of the euro rather than reducing borrowing costs, would be the main reason for a rate cut, a source told Reuters recently.

For others, the recent dovish comments by the ECB hawks suggest an evolution in July. Commerzbank is expecting a 20bps cut in the ECB rate on Thursday to stay ahead of the curve.

(GRAPHIC: #Euroboom days over? – tmsnrt.rs/2O05QUf)

3 – Does the ECB prepare for a return to QE?

Some banks certainly think so and are studying changes to the rules of the ECB to allow the purchase of new badets.

After hovering around 2 trillion euros of public sector bonds since 2015, the ECB has approached the ceiling it had set itself to no longer own one third of a country's debt.

A recent report suggests that the ECB could circumvent the rule by depriving central banks of their voting rights in the event of debt restructuring.

"They might say that they are willing to increase issuer limits, why not do it?" Said Frederik Ducrozet, Pictet Wealth Management's strategist. "It does not take a lot of work."

Speculation that an ultra-easy policy will stay in place for some time could also be fueled if the ECB commented as a result of a recent debate that it is pondering adjustments to its target of $ 40 million. inflation close to 2%.

(GRAPHIC: Quality Assurance Program of the European Central Bank – tmsnrt.rs/2YgbrGJ)

4 – Does Draghi have a vision of Lagarde as the next head of the ECB?

Christine Lagarde, outgoing President of the IMF, will replace Draghi at the end of his mandate in October.

After critics had declared that she lacked relevant experience, representatives of the ECB, such as Benoît Coeure, defended the candidacy, calling it a "qualified single".

Draghi will probably echo this view. One can also ask him if a new package of easing measures just before leaving will tie the hands of his successor.

For the markets, the ECB's accommodative political stance should continue under Lagarde, which had already supported QE in the past. His appointment was followed by another bond market rally and an increase in rate reduction expectations.

(GRAPHIC: from rising rates to rate reduction bets – tmsnrt.rs/32FQxUj)

5 – Could the ECB strengthen TLTRO 3?

The evolution of the ECB's policy has stabilized market inflation expectations, but they remain very low.

The ECB could introduce more generous terms into its plan for more multi-year loans to help boost prices and economic growth.

As part of its new Targeted Long-Term Refinancing Operation (TLTRO), unveiled in June and scheduled for launch in September, the ECB will provide banks with 10-basis-point higher credit rates at lower deposit rates. 0.4% – paying them to take their money.

The minutes of the June meeting showed that some policymakers have advocated for greater generosity of TLTRO terms and consistency with previous packages.

"What we've seen in the last two months is that global growth risks have increased and uncertainty is there, that's where the pressure comes to do more for TLTROs," said James Rossiter. , Head of Global Macro Strategy at TD Securities.

(GRAPHIC: Time to TLTRO, pt III – tmsnrt.rs/32y1oiT)