Mixed signals on the likely timing of ECB easing

Given the increasing market expectations of easing, the key event in Europe next week will be the ECB meeting on Thursday. The ECB is expected to provide more accommodation before year-end - ie, either next week or at the December meeting. There have been mixed signals from ECB members recently on the timing of further easing. Board member Couere joined Weidmann and Lautenschlaeger this week, saying, "It is too early to discuss more QE while it is the ECB's duty to be prepared to cope with all kinds of contingencies". Against this, on Thursday, 15 October, Nowotny said headline and core inflation in the euro area are clearly undershooting the Governing Council's goal and signalled that more easing may be needed. 

The December meeting might be a better opportunity for the ECB to announce further accommodation, for two reasons. First, there will likely be more information on the external environment (China, EM, etc) and on the Fed's policy outlook by then. Second, the ECB will also release its staff projections in December, and it will be difficult to maintain its current 2016-17 inflation projections (1.1% and 1.7%, respectively) without announcing further easing. However, it is still possible that next week it indicates that it will announce additional easing in December but will decide its exact nature at the time of the announcement, which would be similar to how they initially communicated QE in December 2014/January 2015.

Given the recent price action in money markets, there will likely be some questions on the depo rate during Q&A as well. President Draghi is not expected to mention the depo rate cut as an option explicitly, but he is not expected to dismiss it categorically, either. Probably, he will use wording that does not lead the market to dismiss such a possibility. 

"We expect a "buy the rumour, sell the fact" type price action in the EUR rates market: outright German rates, German ASWs and EGB spreads to remain resilient into the ECB announcement before reversing this, at least partly, after the announcement. Therefore, the longer the ECB keeps the markets guessing and delays its expansion announcement, the longer the resilience of outright, ASW and EGB markets can last, in our view", says Barclays.