Skip to main content

ECB board meeting – less dovish than June/ July due to higher forecasts and very easy financing conditions

ECB board meeting – less dovish than June/ July due to higher forecasts and very easy financing conditions                                                                       

  • EUR: The September ECB Governing Council meeting overnight is largely in line with expectations, as the ECB announces its intention to ‘moderately’ reduce the pace of PEPP purchases relative to the last two quarters. The intended change in purchases is not quantified but could be around EUR70bn/month according to Citi analysts and just slightly above Q1’s asset purchases of around EUR60bn monthly. The dovish take is ECB President Lagarde characterizing the recent rise in inflation as temporary with the 2023 inflation forecast still at only 1.5% (up 0.1% vs June forecast) and far short of the ECB’s 2% target.  

  • EUR: But President Lagarde deflects questions about the future of the PEPP asset purchase program which is currently set to expire in March 2022, pointing to the December meeting where its future will be debated. Consequently, the decision to reduce purchases overnight is framed a ‘recalibration’ similar to the decisions in December 2020 and March 2021 and therefore disentangling this decision from the future of the PEPP. That also means some fundamental uncertainties remain, notably the likely size of asset purchases after March (Citi analysts suspect at least EUR40bn/month) and the split between APP and PEPP. 

  • EUR: The more hawkish take is that the ECB has now joined the club of tapering central banks, whereas it had been a dovish holdout for the majority of this year while noting for the first time the possibility that upside price pressures could turn out to be more persistent than expected. This likely limits the negative impact of any Fed tapering on EUR versus USD.

  • EUR: Key highlights and forecasts include – (1) Increasingly advanced rebound in recovery, output back above its pre-pandemic rebound before end of 2021; (2) High vaccination rates and impact of pandemic less severe; (3) Inflation increase to be largely temporary, with upward revision HICP outlook in the short term; (4) Can maintain favorable financing conditions with moderately slower pace of purchases; (5) Euro area GDP to see strong growth in 3Q-21 after 2.2% QQ in 2Q-21; Staff projections see GDP growth of 5.0% [+0.4pp] in 2021, 4.6% [-0.1pp] in 2022 and 2.1% [=] in 2023; (6) ECB staff projections see HICP of 2.2% [+0.3pp] in 2021, 1.7% [+0.2pp] in 2022 and 1.5% [+0.1pp] in 2023; ECB staff projections see core HICP of 1.3% [+0.2pp] in 2021, 1.4% [+0.1pp] 2022 and 1.5% [+0.1pp] in 2023; (7) Underlying inflation to rise gradually in the medium term but risks to economic outlook broadly balanced, though growth could underperform if pandemic intensifies.        


Deepening China CPI – PPI inflation divergence poses policy challenges 

  • CNH: China’s CPI inflation declines from 1%YoY in July to 0.8%YoY in August, below market expectations (Citi/Mkt: 1%YoY) and sequential CPI inflation also moderates from 0.3%MoM to 0.1%MoM. Meanwhile, PPI inflation picks up from 9%YoY in July to 9.5%YoY in August, higher than expected (Citi/Mkt: 9.1%/9.0%YoY) and sequential PPI inflation also quickens from 0.5%MoM to 0.7%MoM. Citi analysts expect the deep PPI-CPI inflation divergence to continue and pose challenges for policymaking. Rising cost pressures on manufacturers, together with a bumpy recovery of downstream demand, pose downside risks to manufacturing growth. Given the largely binding supply constraints, boosting (investment) demand via broad-based stimulus may not be appropriate for now. Therefore, Citi analysts expect policy efforts may need to be more target-oriented, for example, to help SMEs.       


Data due tonight        

  • USD: US August PPI Final Demand MoM – Citi: 0.5%, median: 0.6%, prior: 1.0%; PPI Final Demand YoY – Citi: 8.1%, median: 8.3%, prior: 7.8%; PPI ex Food, Energy MoM – Citi: 0.5%, median: 0.5%, prior: 1.0%; PPI ex Food, Energy YoY – Citi: 6.5%, median: 6.6%, prior: 6.2%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.4%, median: 0.6%, prior: 0.9% - Citi analysts expect a more-moderate, but still-solid, 0.5% increase in overall PPI final demand. The core measure which excludes food, energy and trade services prices should rise 0.4%. Still, persistent strength in PPI goods this year leads Citi analysts to continue to see upside risks for goods prices in CPI, beyond just auto prices which have been a substantial driver of higher CPI prints. Meanwhile, rising services prices in PPI could be a sign that longer-lasting labor shortages might eventually result in more broad-based price gains (for both goods and services potentially) in CPI as well.

  • CAD: Canada Net Change in Employment (Aug) – Citi: 130k, prior: 94.0k; Unemployment Rate – Citi: 7.0%, prior: 7.5%; Hourly Wage Rate Permanent Employees – Citi: 1.2%, prior: 0.6% - Citi analysts expect a somewhat stronger increase of 130k jobs in August following a 94k increase in employment in July. BoC will continue to monitor a number of factors to gauge the recovery in the labor market, including the employment to population ratio, which would need to rise closer to its pre-COVID level of ~62% (60.3% currently or approximately 450k additional jobs) before BoC considers rate increases. Citi analysts also expect wage growth to become increasingly important to assess tightness of the labor market.         

  • GBP: UK GDP Quarterly Estimate, May-July Forecast: 3.6% 3M/3M Prior: 4.8% 3M/3M; GDP Monthly Estimate, Jul Forecast: 0.3% MM Prior: 1.0% MM – Citi analysts expect UK growth to stall in July as acute supply issues associated with both manufacturing input shortages and widespread self-isolation both weigh on activity. Broadly though, the team expects many of these temporary supply effects to reverse through both August and September, implying stronger growth prints ahead. However, these data are likely to pose downside risks to BoE’s already optimistic Q3 GDP forecast, with evidence the recovery in demand may also be moderating. 


This is an extract from the Daily Currency Update, dated September 10, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -

Leave a Reply

Enter the characters shown in the image.