We see the odds slightly in favour of further ECB easing this week. The Governing Council has discussed more easing at the latest ECB meetings and we think the balance will tilt this time. Our main scenario is a small refi rate cut to 0.15%.
This follows mainly as inflation fell to a new cycle-low of 0.5% in March. The decline implies that the ECB's projection for inflation, which was released a month ago, is already too optimistic.
Another important argument for easing is that nominal wage growth declined in Q4. It is now around the level in 2009, when the financial crisis was at its worst. This could be a first signal of second-round effects, which is a concern for the ECB.
On the other hand, the recovery looks to remain on track and most other data including economic indicators and data for monetary development have not deteriorated since the latest ECB meeting. Hence, it is a close call.
If the ECB once again abstains from easing, we expect Draghi to sound dovish, but there will initially be a small disappointment and rates will inch higher. The markets will at some point get enough of soft words and instead demand action.
In short-end EUR markets lots of dovish ECB talk has raised expectations of more easing and the EONIA curve is inverse again. If the ECB lowers the refi rate it will lead to marginally lower rates out to two years as more easing will be priced in.
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