ECB likely to ease policy substantially in September using depo rate cuts and further QE, says Commerzbank

The European Central Bank (ECB) is expected to ease policy substantially in September using depo rate cuts and further quantitative easing (QE), according to the latest research report from Commerzbank.

The Central Bank of Hungary (MNB) is scheduled to hold its next monetary policy meeting later today. Until a couple of months ago, MNB was facing pressure from the FX market to tighten monetary policy: core inflation accelerated to above the 3 percent on the back of high wage growth, the real interest rate fell deep into negative, and the forint came under depreciation pressure.

MNB had to respond: it announced monetary policy 'normalisation' and proceeded to slash some of its signature QE programmes. But this situation has now turned around completely: inflation may be still above target, but it is falling back; what is more, the real economic situation is plummeting across the world, prominently in Germany - an important economic partner, the report added.

The central bank has already reacted to this changed reality by re-expanding its QE programme of forint swaps - both swap tenders of August 12 and 16 witnessed higher volume of liquidity offered by the central bank.

"No actual rate cuts are on the agenda today, but we expect the MPC to signal an easier policy stance, via QE, going forward -- i.e. policy normalisation will be abandoned. The MPC may still maintain cautious language for some time longer as inflation is still above-target and the forint is currently weak within a risk-off environment, but the signal should be clear enough," Commerzbank further commented in the report.