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Draghi expects a huge new stimulus plan

Mario Draghi, President of the European Central Bank.

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The European Central Bank (ECB) and its outgoing President Mario Draghi are in a "Catch 22": the market expects so much stimulus on Thursday, it seems almost impossible to surprise on top.

The economy is showing further signs of weakness, the inflation rate is not picking up and the US-China trade war has no real end in sight. So what will the ECB do?

"We still believe Draghi will have a sufficient majority in the Governing Council to impose a package that will cut interest rates and restart the asset purchase program," said Dirk Schumacher, one ECB official said Natixis in a customer message.

The meeting came about as some ECB hawks in recent weeks tried to downplay the odds of a huge stimulus package.

"Recent comments by the Governing Council, no clear consensus within the Governing Council on the scope and extent of possible easing measures."

Recent economic data do not suggest anything particularly positive, although leading indicators stabilize somewhat to have. The European purchasing managers' indices are stabilizing, even though the weakness in the industrial sector continues. The question is whether and when the impact on the services sector and the labor market will occur, especially in the larger economies such as Germany and France.

Given this huge expectation that the ECB is struggling with, is there room for an upwards surprise?

"Possible surprises could be an expansion of the QE (quantitative easing) universe to new asset classes (senior bank debt or equity) or more radical changes in QE parameters (capital key removal)," said Frederik Ducrozet, who joined the ECB Pictet observed in Geneva.

"The bar for such radical change seems high, although next year we would not rule anything out in a more adverse scenario."

In detail, the ECB is expected to do the following:

  • Lowering the deposit rate.
  • Resumption of monthly purchases of net assets.
  • Strengthening forward alignment by broadening the horizon to keep interest rates at current or lower levels beyond the first half of 2020. [1
    9659014] Introduction of a Tiering system for bank deposits.
  • Increase the self-imposed issuer limit on buying government bonds from 33% to 40% or even to 50%.

If we get that, it will probably be the most comprehensive package of all time by the ECB and a sign that the central bank has changed under new chief economist Philip Lane.

Although critics are increasingly calling into question the effectiveness of further easing, Draghi – in his last weeks as president – is getting louder and louder. Unexpectedly weak inflation is becoming more and more apparent.

"As you know, inflation expectations have been at historically low lows for some time, so let's just think about that – with the admission – and again that's very important – with the admission that we do not like it," he said the last press conference in July.

It is likely that he is not much happier now.

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