ECB preview: Hawkish tone but actual tightening is still far out – Danske Bank

Analysts at Danske Bank expect a hawkish tone from the ECB at the meeting in June after it was perceived as slightly dovish at the latest meeting.

Key Quotes

“A lot of speculation among market participants has been on whether the ECB will change its forward guidance and remove the ‘or lower levels’ phrase from its guidance on policy rates. However, in our view, sticking to this guidance and instead delivering another hawkish twist to the introductory statement is most likely. We expect the ECB to argue that the options provided for further accommodation are less likely to be used.”

“The main argument why the ECB will not change its forward guidance should be that it could result in an unwarranted tightening of financial conditions. According to the ECB, ‘a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up’. Added to this, the minutes from the latest ECB meeting confirm that the ECB considers the forward guidance as part of the current policy stance, which should only be changed when there is sufficient evidence of a sustained adjustment in the inflation path.”

“On the other hand, Mario Draghi has said the ECB’s forward guidance was meant to address tail risk and some tail risks are less and less probable. Along the same lines, the point was made at the latest ECB meeting that it could be acknowledged that recourse to the options for providing further accommodation was becoming less likely. In our view, these arguments should not yet dominate the ECB’s view of a need for a cautious approach regarding the future evolution of its policy communication.”