ECB to Maintain Rates, Markets Looking to Draghi for September Insights

The European Central Bank (ECB) is anticipated to maintain its current monetary policy during Thursday’s meeting. However, President Mario Draghi may provide insights regarding future actions, as analysts believe the bank could have sufficient data on the effects of the U.K.’s withdrawal from the European Union, commonly referred to as Brexit, by September.

Brexit’s Economic Impact on the Eurozone

On Tuesday, the International Monetary Fund (IMF) revised its growth forecast for the eurozone in 2017, lowering it to 1.4% from 1.6%, citing concerns about the consequences of Brexit. Additionally, the consensus for the region’s gross domestic product (GDP) growth for the following year was adjusted down to 1.3% from a previous estimate of 1.6%.

Draghi had previously warned that the eurozone could experience significant economic shifts over the next three years, with a recent report indicating that Brexit has already affected business confidence in the region. Despite this, the ECB is largely expected to maintain a “wait and see” approach to gauge the impact more accurately before making any policy decisions.

As noted by the Bank of England (BoE), official data regarding economic activities following the referendum is still pending.

Morgan Stanley highlighted that the ECB requires additional time to fully assess Brexit’s effects on the euro area before implementing further policy measures.

Expectations for QE Extension and Doubts on ECB’s Effectiveness

Recent surveys indicate that economists widely believe the ECB will keep interest rates steady in this meeting, although many expect the central bank to take action by the end of the year. There is strong speculation that the ECB will extend its quantitative easing (QE) program beyond March 2017.

Other potential moves appear less likely, with only 40% of economists suggesting a possible cut to the current negative deposit rate of -0.4%, and under 20% anticipating an increase in QE purchases from the existing €80 billion monthly rate.

Despite €1.8 trillion in stimulus measures, inflation remains stubbornly low, with June rates at just 0.1%. Analysts are questioning the efficacy of the ECB’s strategies and whether it possesses additional tools to address these economic challenges.

A significant portion of surveyed economists expressed skepticism about the ECB’s ability to influence economic performance and inflation compared to the beginning of the year.

Calls for Fiscal Stimulus May Go Unheeded

The effectiveness of further monetary easing is uncertain, especially in light of the lack of fiscal stimulus. Draghi is expected to reiterate his calls for governments to take action. However, some analysts believe these pleas may go ignored for the time being.

BNP Paribas stated that the responsibility for responding to the Brexit impact is falling primarily on the ECB, which is increasingly aware of its limited options.

Attention Shifts to Draghi’s Potential Future Hints

With no significant changes expected, attention will be on Draghi’s subsequent remarks. Scheduled for 12:30 GMT, his discussion may indicate intentions for future policy adjustments, particularly in view of the ECB’s next policy meeting on September 8.

Morgan Stanley suggested that strong signals from Draghi regarding potential ECB policy actions in September would be beneficial, allowing the bank to incorporate updated economic projections and results from bank stress tests into their plans.