Thursday preview: ECB expected to follow BoE's lead on policy

The European Central Bank is expected to follow the Bank of England's lead by waiting for more post-Brexit economic data before boosting stimulus.

The ECB meets on Thursday and is widely forecast to leave its €1.8trn stimulus package unchanged along with interest rates, the deposit facility rate and the marginal lending facility rate. It marks the first policy meeting since the UK voted to leave the European Union on 24 June.

FXTM research analyst Lukman Otunuga said the current unstable financial landscape has created a period of central bank caution consequently forcing most central banks to remain on standby.

The BoE shocked the market last week by deciding to keep interest rates unchanged until economic data covering the period after Brexit becomes available.

“The impacts of the Brexit have already rattled the European Union with expectations mounting over a potential decline in GDP growth,” said Otunuga.

"Even before the Brexit woes, Europe was entangled in a battle with static inflation while ongoing global events exposed the nation to downside risks.”

President Mario Draghi has highlighted the UK’s vote to leave the European Union on 24 June as a key risk to eurozone economic growth. Shortly after the outcome of the referendum, he told EU leaders Brexit could reduce eurozone growth by a cumulative 0.3% to 0.5% compared to previous estimates over the next three years.

However, after recent efforts to turn the eurozone economy around with loose monetary policy, economists say the ECB is running out of ammunition.

Yet Draghi is expected to reiterate the ECB’s willingness to take further action within its mandate when he addresses reporters at the press conference following the policy announcement.

“In the absence of fresh measures, we do expect Mr. Draghi to underscore that the ECB stands ready to add more stimulus if its forthcoming analysis indicates that this is warranted,” said Rabobank.

“One particular question is whether the ECB would be prepared to take the deposit rate further into negative territory (we are still calling for a 10 basis point cut in September), if only because it would re-affirm its dovish stance and is the easier one among its options.”

Thursday 21 July

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