We expect another wait-and-see ECB meeting. Mario Draghi will sound dovish as inflation was below ECB's expectation again in April, but the Governing Council should refrain from action at least until the release of updated projections in June.
A trigger for further easing could be any sign of de-anchoring of the longer-term inflation expectations reported in ECB's Survey of Professional Forecasts for Q2.
The appreciation of the euro has continued after Draghi said a strengthening would require further monetary policy accommodation, but for now we think Draghi will stick to his old strategy of verbal intervention.
The EONIA O/N fixing above the refi rate should not be seen as an unwarranted tightening of the policy stance as it has not propagated to the medium-term curve. Instead, we expect Draghi to highlight that the market has corrected itself.
Bank lending to the private sector continued to decline in March, but we think ECB will continue to see through the decline in lending as long as it does not worsen, the recovery gains momentum and ECBs comprehensive assessment is ongoing.
If the ECB decides to ease due to the very low inflation, we expect a refi rate cut, although Draghi has said a QE programme is needed to increase the degree of monetary accommodation. In our view, it is too early within the next two meetings.
There are still expectations for further ECB action in the markets, but little is priced in the coming meeting. Hence, an unchanged policy should not cause great move-ments in itself but Draghis communication at the press conference is important.
To Read the Entire Report Please Click on the pdf File Below