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WHAT WILL THE ECB MAKE OF ALL THIS?

The European Central Bank announces policy on Thursday and is widely seen lowering its deposit rate for a sixth time this cycle, bringing it to 2.5%, but the extent of any future moves may be getting more uncertain.

"Recent commentary from ECB hawks suggests that future rate cuts and their timing will be more keenly contested," says Joe McConnell, European liquidity strategies portfolio manager at J.P. Morgan Asset Management.

Most analysts believe ECB President Christine Lagarde will keep her options open, given the uncertain global trade picture and expectations of a massive fiscal 'bazooka' in Germany.

Citi expects the governing council to "maximise optionality" about subsequent moves.

"Beyond the very likely 25 bp cut, we think this may translate into a more cautious communication, no longer asserting that monetary policy is restrictive," they say.

"We would not read this as a sign that a pause in the easing process is forthcoming, however. Shifting geopolitics may eventually generate reflationary fiscal policies, but in the near term, they will likely increase the argument for monetary easing."

Goldman Sachs also thinks the ECB will prefer an incremental change to existing communication that policy is 'restrictive'.

"We...believe that a softening of the language-for example, by saying that policy remains “somewhat restrictive”—is more likely this week," they say.

For now, markets are currently pricing in about 73 basis points of further easing this year, implying about three 25 bp moves (including tomorrow's likely cut).

State Street Global Markets doesn't think the ECB can cut much more than that without evidence of a sharper growth slowdown of deeper reversal in the labour market.

(Samuel Indyk)

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