ECB on hold to gauge effect of new policies

The ECB is very unlikely to unveil additional policy support at its policy meeting on 3rd July as it waits to judge the effect of the raft of measures announced in June. President Draghi is likely to reiterate that interest rates should be on hold for a long time yet. He will probably also explain that a broader programme of quantitative easing involving government bond purchases is within the ECB’s mandate. But he will claim that inflation expectations are well anchored and that such steps are not necessary for now. We disagree and think that, as deflation risks grow, the ECB will be forced into taking bolder policy action.