Three things to watch when the ECB meets Thursday

AFP / Getty Images

To you, Mario Draghi.

After hinting at a possible rate cut by Federal Reserve Chairman Jerome Powell, and some clues that an easier policy might be envisioned by the main Australian monetary policy maker earlier this week, the President of the European Central Bank should also maintain an accommodating attitude in his post-meeting. press conference Thursday.

This could serve to keep the pressure on the euro

EURUSD + 0.1783%

the analysts said. The common currency fell 0.2% Wednesday to trade at nearly $ 1,1222 and remains below more than 2% so far in 2019 against the dollar.

"The markets already seem to be waiting for a calm meeting of the ECB based on our recent discussions with investors, although it is more on tone than on political action," wrote currency analysts. at Bank of America Merrill Lynch in a note on Wednesday. "We think Draghi should feel comfortable with the low level of the euro, but his accommodating tone and his threats of further policy easing measures, if necessary, could still be negative. for the euro. "

The ECB is committed to leaving interest rates at current levels until at least the end of 2019.

Here's what economists and investors will watch when the ECB closes the two-day meeting in the Lithuanian capital of Vilnius – one of two meetings the central bank holds each year in front of its headquarters in Frankfurt.

TLTRO

Five letters will probably attract a lot of attention. It is generally expected that the ECB will finally provide details on the third iteration of its targeted long-term refinancing operations, or TLTROs. The acronym may be awkward, but the program, which aims to keep the credit obligations of euro area companies open against the economic downturn and inflation well below the ECB's target, is important.

The ECB has announced that it will present a new TLTRO series in March, but has delayed crucial details that investors and economists will use to gauge the strength with which the ECB is taking action to stimulate the economy of the zone. euro.

"We expect that TLTRO3 will be slightly less generous than TLTRO2, but the ECB could also feel the need to take out additional liquidity insurance by surprising with a generous TLTRO3," Societe Generale economist Anatoli Annenkov said in a statement. . Note.

The decision to launch another program was seen as a reversal of the tightening process that had characterized the ECB's policy in 2018 by ending the bond-buying program that had been at the heart of its effort to reduce the size of the debt. Quantitative easing.

Under the TLTRO program, banks benefit from long-term, low-cost loans. The "targeted" part of the name refers to the requirement that banks should in turn boost lending to the real economy. If they do, they are actually paid to lend, banks participating in the TLTRO2 program that can be compensated at the ECB deposit rate of less than 0.4%.

We will closely monitor the degree of generosity of the ECB at its third cycle.

Market participants "are likely to judge Draghi's" dovisuity "simply on the basis that the achievable threshold is effectively -0.40% or higher, which the ECB's" sources "seemed to refer to a few months ago, "said Marchel Alexandrovich, Senior European Economist at Jefferies, in a note. "Whatever the initial securities, however, as always with the ECB, the heck of what is actually offered will be in the details."

Forecasts

Investors will also pay attention to ECB staff forecasts on the economic outlook and inflation.

The ECB is probably too pessimistic about its short-term growth prospects but too optimistic for 202, said George Buckley, economist at Nomura, in a note. It expects the ECB to expect gross domestic product for 2019 to grow by 1.2% in 2019, compared with 1.1% in March, while growth forecasts of 1.6% in 2020 and 1.5% in 2021 remain unchanged.

He also wants the ECB to raise its inflation forecast for 2019 from 1.2% to 1.3%, while maintaining its forecasts at 1.5% in 2020 and 1.6% in 2021, while remaining well below the ECB target of just 2%.

For investors, the question of whether the ECB maintains its base inflation forecast for 2021 unchanged at 1.6% is however particularly important, said Mr Alexandrovich, stressing that this figure is particularly interesting in the measure where it is the first forecasts prepared under the ECB. new chief economist, Philip Lane, who replaced Peter Praet earlier this month.

Hierarchical rate

The ECB's negative deposit rate of less than 0.4% has long been a source of unease. Critics fear that the rate applied to deposits parked overnight at the central bank, in negative territory, undermines the health of banks and hampers credit.

The ECB could possibly consider setting up a tiered system that would exempt some of the excess reserves in the banking system from negative rates. But many economists argue that it still has not looked like.

Buckley said that a move to progressive rates was likely to send a "wrong message", leaving investors with the idea that the ECB intended to keep deposit rates "at very low levels for a while." considerable time (which would have the effect of smoothing the curve, the situation of European banks is even worse). "