ECB's next step may be expansion of asset purchase program

There has been a consistent tone in most recent comments by ECB Governing Council members. These comments have not strayed far from the stance communicated in the September press conference, the ensuing Monetary Policy Accounts and in Draghi's testimony before European Parliament.

Dovish comments made last week by Governing Council member Nowotny were seen by some commentators as a departure from this 'policy line' (as some commentators saw him as hinting at fresh measures), but we believe that Nowotny's comments were taken out of context.

In a nutshell, the key message of the Governing Council's stance is that whilst weakness in demand in emerging markets is not something that is about to go away anytime soon and that downside risks to the economy have increased, it is too early to draw a firm conclusion with regard to the need for fresh policy measures. However, the door to further accommodation has been left open, as the Governing Council has also noted that it will use all necessary tools should downside risks materialise.

With market participants increasingly speculating about additional policy measures, there is some risk that the market could be disappointed. However, the tone of this week's message is likely to remain dovish in any case. 

"It is believed the ECB is merely buying time to get a better grip on underlying developments. We stick to our view that an expansion/extension of the asset purchase program is the most likely next step by the ECB, but we believe this will take place in December at the earliest", says Rabobank.