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PREVIEW: ECB’s account of October meeting

FXStreet (Mumbai) - The European Central Bank’s October meeting minutes will be released today. The tone of the policy stance was more dovish than expected. The Governing Council reiterated the possibility of cutting the deposit rate and also stated that the "ECB balance sheet will continue to expand until we see a sustained adjustment in the path of inflation”.

Before the October meeting, the ECB council member Ewald Nowotny had mentioned a possible QE expansion is something “we’ll discuss when there’s a need,” while Bank of France Gov. Christian Noyer felt that the current bond-buying program is “well calibrated”.

In the minutes to be released today investors will look for clues to know what the central bank plans to do in December. The ECB minutes is expected to speak of the downside risks to the economy particularly with respect to the recovery of inflation. The central bank’s aims to ensure price stability in the euro zone and has been struggling to move inflation closer to its 2 per cent target. Inflation presently stands at negative 0.1%. Executive board member Yves Mersch had noted “amid the renewed decline in headline inflation, we have to be mindful whether there could be second-round effects stemming from the decline in oil prices, or if there is an overestimation in the assessment of the Chinese situation.” The euro zone deflation in September had likely mounted pressure the ECB to step increase its stimulative action at its 22 October policy meeting.
Societe Generale expects ECB to announce a 10bp deposit rate cut. ECB can also be expected to mention its intention to extend the QE and TLTRO programmes beyond September 2016 as well as increase the size of asset purchases from euro 60bn to 70-80 billion euro. With respect to the rate cut, it must be remembered that Mario Draghi has repeatedly stated that interest rates have already reached their lower bound. This statement is likely to raise doubts on the ECB’s rate cut intention.

In the minutes it will be interesting to see if the central bank’s governors have expressed their opinions on the magnitude of the possible rate cut. It will also be worthy of interest to note governors’ views on the possible expansion to new asset classes, in case they have expressed any.

The minutes is likely to reveal that the ECB is contemplating purchase of corporate bonds to complement its QE programme. The ECB has likely been investigating possible purchases of municipal and regional bonds to boost German assets in case the QE programme is extended.

It has not even been a year since the ECB introduced its quantitative easing programme and investors are already speculating its extension. The question now is not whether the central bank will extend the QE programme; rather it is when the next stimulus programme will be announced.

Markets however believe that the October meeting was an intermediate one and only in the December meeting will the ECB update its projections. Last week’s data which showed that inflation in the bloc has slipped back into negative territory has further strengthened the case for a rate cut as well as the need to adjust the size, duration and composition of the QE programme in December.

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