European Central Bank President Mario Draghi (R). Photo: Reuters, Ralph Orlowski

European Central Bank will stay on course this week, Goldman Sachs analysts say:

“We continue to expect the ECB to leave its key instruments — policy rates and the parameters of its asset purchase programme — unchanged at tomorrow’s Governing Council (GC) meeting.

“Attention has focused on the ECB’s policy guidance. Two issues stand out: (1) indications about the sequencing of any future policy normalisation; and (2) the role of the ‘easing bias’ in policy rates signaled by the expectation that they will remain ‘at present or lower levels’ (emphasis added).

“Given that Governing Council members have worked hard to resist what the GC appears to view as a market over-reaction to refinements in ECB communication in March, we expect Mr. Draghi to err on the side of caution in his press conference this week, and maintain the phrase ‘or lower’ in his Introductory Statement.

“In an environment where markets are prone to price a more hawkish path of forward rates, discretion is likely to prove the better part of valour, even if monetary policy makers share our and the markets’ assessment that the likelihood of further rate cuts is low.

“Looking forward to the June and subsequent Governing Council meetings, we expect the ECB’s policy guidance to evolve in a data-dependent manner. Stronger data are likely to permit ‘or lower’ to be dropped from the Introductory Statement and greater flexibility on the sequencing of policy normalisation to be envisaged. But more mixed data (and a stronger Euro exchange rate) would likely reinforce the cautious approach we expect from the ECB this week.”