WOOD Flash – EME Macro/Strategy: ECB – another wall of money coming

During the press conference after the Monetary Policy Council meeting today (25 July), ECB President Draghi strongly signalled that further monetary stimulus is likely to take place from September, in the form of interest rate cuts and probably quantitative easing. This will be on top of the already announced long-term liquidity operations that will begin in September. The key triggers for further stimulus are persistently low inflation and downside risks to GDP prospects, with a strong emphasis on the slowdown in Germany and Italy. In our view, the ECB is also getting ready should a hard Brexit materialise in October. We present an updated scenario for our Euro-Dollar projection, under a very aggressive monetary stance by the ECB: beware that these adjustments do not change the trend we have flagged before. On the other hand, it is quite difficult to achieve an accurate forecast on what will happen to bond yields, which have already compressed by 100bps in CEE recently for the 10-year tenor, and may be up as much in the coming months. The most important effect, in our view, is that the steady stream of dovish signals from the ECB and the Fed add to our view that the business cycle is being extended forcefully and we are at the inflection point currently. The labour market is softening in most places, but the unemployment rate will hardly rise, keeping any deterioration in the credit cycle at the minimum. The ECB will need to see a boost to lending growth before it will stop the easing bias, in our view.