ECB review: never say never

ECB meetingECB's headquarters

BofA Merrill Lynch | Our base case remains: if data stabilises, the ECB will be keen on hiking at the end of this year. But our conviction level is low (and declining) – similar to the ECB’s. The alternative, we argued, would be no hike this year, a long extension of forward guidance beyond market pricing and tiering.

The debate is shifting from base or risk scenario to the details (what to do?) and sequencing (how quickly to do it?) in the risk scenario. We would expect the ECB to move in steps a) details on TLTROs in June and b) further data assessment through the summer, c) if external traction remains weak then, aggressive extension of forward guidance in September, then paired with some palliative help for banks (ie tiering), to help cope with having negative interest rates for much longer.

To take very drastic decisions as early as June, we would probably need to see a severe shock – a no-deal Brexit or auto tariffs, for instance. “Only” the persistence of global uncertainties might not be enough to trigger a large move in forward guidance as soon as in June. Data flow until then might not suffice for a very radical change: we will only get 1Q GDP data (unlikely to be too bad given the latest IP prints) and two months of PMIs, and it might be too early to see the improvement in China (if sustained) in Euro area numbers yet, given the lag is typically 3-4 months and June PMIs will be released only after the ECB’s June meeting.

Generous TLTRO?

We would highlight the additional flexibility added to establish TLTROs pricing. By adding the assessment of the economic outlook to the transmission channel of monetary policy we no longer need to see a deterioration in the quantity and pricing of lending flows to get generous pricing. If the outlook remains bleak that could still suffice. We hence see a significant probability of very generous TLTRO pricing not far from existing ones.