ECB won't disappoint this time around, says Goldman Sachs

As some analysts cautioned that Thursday’s European Central Bank announcement could disappoint like December’s, Goldman Sachs said we could be in for a dovish surprise.

Stock markets slumped back in December when European Central Bank chief Mario Draghi failed to announce as much stimulus as investors had priced in.

However, Goldman Sachs, which expects to see a 10 basis-point cut to the deposit rate, a €10bn increase in the monthly asset purchases and another six-month extension of the QE programme, said the situation this time around was different.

“In the wake of the December disappointment, the market is understandably asking whether the ECB has shifted towards incrementalism, with doves on the Governing Council – chief among them President Draghi – unable to push through more aggressive measures. We are in the camp that December was an unfortunate outlier,” the bank said.

GS highlighted three factors that make this meeting different.

It said the central bank has had more time to digest low inflation data. It noted the dovish inflation surprise before the December meeting, with core HICP falling from 1.1% to 0.9% year-over-year in the advanced November reading. However, that was just a day before, “leaving little time for it to be incorporated into the debate on the Governing Council,” said Goldman.

The latest reading on inflation ten days ago showed core inflation fell from 1% to 0.7% year-over-year and although it too comes too late to feed into the forecasts, “there is more scope for this data point – which brings core inflation back to near its trough last year – to feature prominently in the discussion”.

In addition, the bank pointed out that Draghi has kept more or less schtum in the run-up to this meeting, with his last speech on 4 February a fairly tame affair.

In Draghi’s speech in Frankfurt on 20 November, the ECB head said inflation needed to be brought up quickly, signalling urgency for the upcoming meeting.

“We think the radio silence now signals a greater effort to build consensus for meaningful easing behind the scenes and avoid a repeat of the appearance of front running.”

Finally, Goldman highlighted the fact the Fed was likely to stand pat on rates at next week’s meeting, unlike last time when the rate hike was around the corner.

“We expect substantial easing today, which should see EUR/$ down on the day,” said currency strategist Robin Brooks.