Previews and Perspectives for Thursday, July 25

ECB expected to pave the way for a rate cut in September — The consensus is that the ECB at its meeting today will revise its guidance language to indicate that a -10 bp rate cut is coming at its next meeting in September.  The ECB could cut rates as soon as today, and the market is discounting a 39% chance of a rate cut today.  However, a rate cut is considered more likely for the September meeting since the ECB at that meeting will issue updated macroeconomic forecasts to support any policy change.  The ECB at its September meeting is also generally expected to restart its QE program.

The current guidance is that the ECB expects rates «to remain at their present levels at least through the first half of 2020.»  The ECB today is expected to adjust that guidance to allow for a rate cut, e.g., by saying that the ECB expects rates to remain «at or below their present levels…»

ECB President Draghi has only three policy meetings left before his term ends on October 31, i.e., meetings today, Sep 12, and Oct 24.  Former IMF Chief Lagarde will become the new ECB President on November 1.  The market consensus is that Mr. Draghi will implement aggressive stimulus moves before he leaves office, relieving Ms. Lagarde from being forced to ease policy immediately and risk being viewed as a perma-dove.