Monetary policy decision: All eyes on the ECB

The ECB is expected to nod in the direction of further policy easing at this week's Governing Council meeting (Thursday), with risks skewed toward more forward-leaning guidance and possibly even action.

Since the last policy meeting in July, effective appreciation of the EUR, falling commodity prices, and an elevation of the risks to foreign growth have reduced the near- and medium-term inflation outlook and tighten overall financial conditions as breakevens have fallen anew. The ECB staff macroeconomic projections are likely to show a downward revision in inflation forecasts for both 2015 and 2016. Thus, the ECB, at a minimum, is expected to signal its ability and willingness to ease further if monetary and financial conditions tighten further. 

By year-end, it is expected that the ECB will announce an extension of the minimum period for its asset purchase program - an announcement that may even come next week - and possibly in the future extend the size and scope of the purchase program or a cut in the deposit rate further into negative territory. 

"We believe that the last of these measures - although highly unlikely at next week's meeting - would be most effective in generating greater downward pressure on the EUR, but all should lead to some measure of additional depreciation", says Barclays.

In terms of data, consensus expect August euro area "flash" HICP inflation to have declined by 0.1 percentage point, to +0.1% y/y in August (Monday), and core inflation to have eased to +0.9% y/y, from +1.0% y/y previously. Headline inflation is expected to decline further to zero in September and October before it starts recovering from November onward. Final August euro area manufacturing and services PMIs (Tuesday and Thursday, respectively) are likely to be confirmed at 52.4 and 54.3, in line with the consensus forecasts.