Depends on the data? Five questions at the ECB | Investment News

The horizon line with its financial district and the headquarters of the European Central Bank (ECB, R) are photographed in the early evening in Frankfurt, Germany, on October 5, 2018. REUTERS / Kai PfaffenbachReuters

By Dhara Ranasinghe and Ritvik Carvalho

LONDON (Reuters) – The European Central Bank is holding its first meeting of the year on Thursday as worries grow over the country 's weak economic growth and the risks abroad of trade and economic tensions. Brexit.

After ending its recovery plan in December, the head of the ECB, Mario Draghi, should probably insist on how the central bank will tackle the new economic crisis.

Here are some of the key questions on the radar for the markets.

1. Will the ECB change its badessment of the risks facing the economy?

A series of disappointing data, particularly from Germany, the most powerful economy, suggests that the slowdown in growth may be stronger than expected.

Draghi said last week that the slowdown could last longer than expected and that the economy still needed support. But he added that the bloc was not heading for a recession.

In December, the ECB refined its statement to reflect growing economic concerns while maintaining a reference to balanced risks. Economists expect the wording to remain unchanged this week and say it will be more likely to change the balance of risk for growth in March, when the next economic forecast comes due.

If some believe that the badessment of the balance of risks could be degraded, markets would seek a political response without this happening. So, the argument against changing the badessment is to keep the expectations mute.

For an interactive version of the table below, click here https://tmsnrt.rs/2HmeskS.

Chart: disappointed German data – https://tmsnrt.rs/2Hm6jwL

2. What about indications that rates will remain outstanding during the summer? Could this change?

No immediate changes are expected this week, but rate forecasts are clearly at the center of concern, given the weakness of data and the concern over the impact of developments outside the US. block, such as a downturn in China and Brexit. The government shutdown could also hurt the US economy and increase worries about global growth.

Since the last ECB meeting, the markets have re-evaluated the rate outlook of the main central banks. Bets on US rate hikes this year have been canceled.

Eurozone money market prices suggest investors are not expecting the ECB to raise rates until much of 2020. In December, a 10 basis point rise this year was forecast.

Economists have also changed their minds: according to ABN AMRO, the ECB will signal that rates will remain pending until 2019 by the June meeting. HSBC does not anticipate any change in the ECB's deposit rate until at least the end of 2020.

Chart: When will the ECB increase interest rates? https://tmsnrt.rs/2AQmxc2

3. When does the ECB expect inflation to rise?

The easing of inflation complicates the ECB's rate hike plan. Inflation in the bloc fell more than expected in December, reaching 1.6%, eschewing the ECB's target of just under 2%.

If there is any doubt about inflation, Draghi may need to focus more on comforting the underlying price pressures as wage growth increases.

As inflation and growth in the eurozone are expected to fall, it is not enough to unravel expectations of rising rates, said Sabine Lautenschlaeger, the ECB's most famous executive hawk, from an interview granted last week.

Chart: Reduced inflation complicates ECB rate hike plan – https://tmsnrt.rs/2AQuG03

4. Was the weakness of the data encouraging the ECB to start discussions on new multi-year loans to banks?

The minutes of the last ECB meeting showed that policymakers should discuss new multi-year lending to banks, a powerful stimulus tool, in the coming months as they navigate a global context. " fragile and fluid ".

Investors want more details on what a new set of bank loans might look like. This means that a question about new bank borrowings could arise during the press conference, even though badysts say that it is still too early for the ECB to give details.

Multi-year loans inject liquidity into the financial system by encouraging commercial banks to lend to businesses and consumers. The previous four-year TLTROs expire in mid-2020 and lenders will have to start deciding about how to replace them by about one year before they expire.

Chart: Spread between yields of euro corporate bonds and benchmark governments – https://tmsnrt.rs/2RTOqcB

5. Is the ECB ready for a Brexit without a transaction?

The deadline of March 29 set by Great Britain to leave the European Union is fast approaching, but the exit agreement of Prime Minister Theresa May has just suffered a decisive defeat in Parliament.

While the degree of uncertainty remains high, concerns that the UK has left the EU without an agreement have subsided.

Risk reversals in sterling suggest that the currency markets are less worried about the prospects of a Brexit without a transaction.

While the popular market gauge, which indicates the ratio of calls to issues on a given currency, is still cautious, it has recovered from the extreme bearish of the pound in November.

The financial sector is ready to face the consequences of a Brexit without agreement, said Francois Villeroy de Galhau of the ECB last week.

"Draghi could be questioned about what the ECB would do in case of no agreement," said Frederik Ducrozet, a Pictet Wealth Management strategist in Geneva.

"… The least resilient solution would be to use the prospective directive not to raise rates this year to a minimum."

Chart: Sterling risk cancellations – https://tmsnrt.rs/2Hhc4vS

(Dhara Ranasinghe Report, Ritvik Carvalho Graphics, Saikat Chatterjee Additional Report, edited by John Stonestreet)

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