ECB preview-more wait and see

Economists expect the ECB to keep its powder dry at the meeting on Thursday, but to retain a dovish tone and reiterate that it can adjust the size, duration and composition of the QE programme.  From a market perspective, the meeting should not provide further clarity but is likely to be seen as an 'intermediate meeting' ahead of the December meeting, when the ECB will release updated projections. Only one out of 43 analysts in a Bloomberg survey expects the ECB to step up its QE programme in October whereas 51% expect it in December.

Very low market-based inflation expectations still put strong pressure on the ECB and we expect the door for more easing to be kept open, but we do not see Draghi signalling that further deposit rate cuts are on the table.The ECB is only a third into its QE purchases and a number of ECB members have recently repeated the message from the September meeting that it is too early to decide whether more easing is needed.

The ECB is currently focusing on the lower cost of borrowing and better availability of credit from the monetary policy transmission. However, ECB members also see downside risk to inflation from the emerging market turmoil, the stronger euro and the lower oil price, but despite the latest weak German data, the impact is still judged to be uncertain.

 Deflation print in September should not be enough for ECB to ease again. Draghi said in September that 'we may see negative numbers of inflation in the coming months. The Governing Council tends to think that these are transitory effects, mostly due to oil price effects'. See Flash comment: Back into deflation, but Draghi will wait for more inflation prints, 30 September 2015.

"We still expect the ECB to extend its QE purchases beyond September 2016, but do not think it will be announced before the December meeting. The ECB may stay on hold until Q1 16. We see three potential triggers for more easing from the ECB: 1) the growth outlook deteriorates, 2) the ECB lowers its headline inflation projection, and/or 3) the ECB lowers its core inflation forecast", says Danske Bank.

"In fixed income markets, a deposit rate cut is priced in with more than a 50% probability - in our view, the ECB is more likely to extend or increase the monthly QE purchases. Hence, we see the pricing as too aggressive.  In FX markets, we expect EUR/USD to be little changed with risks tilted to the upside, as the ECB fails to deliver fuel to expectations on ECB-Fed divergence for now "added Danske Bank.