We expect the ECB to remain on hold in December as it waits for the take-up at the TLTRO auction in mid-December. Nevertheless, we expect Draghi to sound as dovish as he can without actually easing.
This is our expectation despite dovish comments from a number of ECB members, including hints about potential government bond purchases, but our view reflects some opposition to more easing within the Governing Council.
One trigger for more easing from the ECB would be that the current measures are not enough to boost the balance sheet, and so far the ECB still expects the balance sheet to move towards its early 2012 dimensions.
However, after the take-up of the December TLTRO, the ECB should start to realise more is needed to boost the balance sheet towards EUR3tr, as the TLTRO is the measure with the largest potential to increase the balance sheet.
The ECB will lower its inflation projection, but in our view it will mainly be in 2015 that the drop in the oil price will have a significant negative impact. For 2016 the ECB will probably keep the forecast almost unchanged, hence it can argue that in the medium-term the inflation outlook has not worsened.
Over the past week in particular the periphery has rallied at the prospect of further easing, and a decent probability of government purchases is priced in by now. Hence, a very soft stance from Draghi is needed to avoid spooking the market. The money market should be less sensitive to Draghi's 'sweet talk'. Here the upcoming TLTRO uptake and LTRO repayments are the main events.
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