More dovish messages from ECB seem inevitable at the upcoming meeting. Clouded by Brexit uncertainty, trade conflicts with the US and global economic slowdown, economic developments since the January meeting turned out weaker than expected. We expect ECB to revise lower its GDP and inflation forecasts, extending the duration that policy rates would stay unchanged and provide stronger hints about the new lending facility (TLTROs).

Further Downgrades on Economic Forecasts

Since the January meeting, economic data in the Eurozone showed further slowdown. GDP growth was only +0.19% q/q in 4Q18. While net exports were the key drag, contributions from household consumption and investment on growth diminished significantly when compared with the prior quarter. Country-wise, Germany barely avoided entering technically recession with zero growth in 4Q18. Yet, Italy has already in recession. On inflation, the headline reading recovered to +1.5% y/y in February, after a sharp fall +1.38% y/y in January. While the headline reading can be volatile due to oil price, core CPI, supposedly a measure of the underlying price momentum of an economy, eased to +1% y/y, compared with consensus of +1.1%. Unemployment rate was unchanged at 7.8%, compared consensus. That’s the lowest level since October 2008. Yet, the employment situation is diverged in different member states. For instance, Greece and Spain are still embracing double-digit unemployment rates.

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Last month, the European Commission trimmed its forecasts for the bloc’s GDP growth +1.3% for 2019 (from +1.9%) and +1.6% (from +1.7%) for 2020. We expect ECB would deliver a more dovish tone in the economic outlook. Besides reiterating that the risk of growth is to the downside, it would also revise lower its projections for both GDP growth and inflation.

Forward Guidance

In January, ECB simply repeated December’s statement, noting that there would no rate hike “at least through the summer 2019”. Given the rapid economic slowdown, it would be prudent for ECB to extend the duration to at least “end of 2019”. On the reinvestment process, the central bank would affirm to “continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary”. While giving no definite timing for the end of reinvestment, i.e., the beginning of balance sheet reduction, we anticipate it would continue at least through end-2020.

TLTROs

While announcement of the new lending facility has been long-awaited, it is not certain whether ECB would talk about the details at the upcoming meeting. Speeches from ECB officials appear to signal that it is still in discussion and analysis stage. It is possible that President Mario Draghi could hint about the operation without giving more details.

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