ECB preview: No change this week but euro area QE is here for the long haul

This week ECB is expected to continue sending a dovish message of standing ready to act if needed but, given the insufficient evidence of a sharp slowdown, no policy action is expected. While recent German data wobbles add to the uncertainty and downside risks, either VW or China is not expected to derail euro area growth in the short term. The baseline scenario assumes an extension of the QE and TLTRO programmes beyond September 2016, adding also a corporate bond purchase programme in the spring of next year. 

If a weaker inflation outlook emerges in the short term, accelerated asset purchases are expected. In the longer term, prolonged QE could raise supply concerns and in an SG scenario of persistent lowflation, any further shock could force the ECB to consider both the formulation of its target and new asset purchase classes, including equity.

With headwinds for the euro area coming mainly from external demand, one option for the ECB would be to push for a weaker euro but it would require a major depreciation to create some positive momentum for exports in a world of weak demand. This suggests that quite extreme measures would be needed from the ECB. With lower market rates, expectations of a cut in the deposit rate have recently risen. While having the possibility of affecting the exchange rate, the room for manoeuvre is small and far from sufficient to achieve the big euro depreciation needed. Instead an accelerated QE programme is expected as a first line of defence.