New ECB call: We expect a first rate hike of 20bp in December 2019, i.e. after Mario Draghi’s reign ends (October 2019). Previously we expected 10bp in June 2019.
We postpone our estimate of the ECB’s first rate hike due to increased downside risks to growth and inflation and we believe the ECB will revise its growth forecast down in its next staff projection in June.
Our key takeaway from the March ECB meeting is that the ECB will be reactive and not proactive. This was reflected in the accounts, which six times mentioned ‘patience and persistence’ regarding monetary policy. Added to this stance is an inflation profile that continues to be subdued and, consequently, we expect ECB to prefer taking a cautious stance.
The still-solid growth dynamics and no deflation risk support ending QE in 2018…but, in our view, a rate hike will come only once inflation is on a self-sustained path towards the target of ‘below, but close to, 2%over the medium term’.
Our updated inflation expectations, which also include 2020, are 1.4%, 1.4% and 1.5% for 2018, 2019 and 2020, respectively. We expect core inflation to be 1.5%in December 2019.
Our view on next week’s meeting
We expect the meeting to be relatively uneventful in terms of new information.
We expect Draghi to acknowledge the FX, trade war risks and downside risks to the ECB’s growth forecasts on the back of the moderation in data as the main risks to the downside.
In particular, we expect a softer tone in the ECB’s assessment on growth, which in March was ‘strong and broad-based’ and ‘projected to expand in the near term at a somewhat faster pace’.
We present a ‘buzzword bingo’ at the end of this preview, which includes our view on potential change for next week.
Fixed income: The 10Y German yield has been characterised by range trading. Our tactical trading recommendation is Buy Bunds if the yield is close to 0.8% and sell them if it is close to 0.4%. Buy the Bund spread close to 40bp and sell when it is above 50bp.
FX: A hesitant ECB in April should help EUR/USD slide within the recent range, helped by a relatively cyclical outlook and stretched positioning. We are tactically short the cross for a 1-3M dip. However, medium term, we still project EUR/USD upside on a 6-12Mhorizon. We remain strategically long the cross via options (December 2018 expiry).