Going into the ECB meeting Citi economists and the market are expecting a 10-15bp cut in both main refi and deposit rates. In addition, investors expect additional liquidity and credit-easing measures in the form of suspension of SMP sterilization of FLS-type of longer-term program.
With so much expected from next week’s meeting, focus is shifting to what the Governing Council could do to ‘surprise’ the markets.
The ECB could surprise the markets by signaling that more aggressive unconventional measures (QE) could be on the cards before long: 1/ Lower inflation and growth forecasts – The European Commission has recently lowered its inflation forecasts for the single currency area to 0.8% in 2014 and 1.2% in 2015. 2/ Indications during the Q&A that the ECB is ‘comfortable’ with more aggressive measures at the coming meetings.
If the ECB does not surprise markets, we could see a short-squeeze initially. We would still think, however, that the medium term risks for EUR could be on the downside.