If European Central Bank (ECB) Governing Council members were hoping for a quiet end to the summer after the Greek drama gripped global markets in July, they were surely disappointed. Haven't we learned in the past five years that August is full of surprises often in the form of nasty volatility? This year was no exception.
This time the culprit was not Greece but China, as it unexpectedly devalued its currency and pulled several about-faces on whether it was letting the yuan float freely and whether it was propping up blue chip stocks.
One prominent Governing Council member, Vice President Vitor Constancio, played down the volatility in China's stock market at a conference in Germany last week. He added that "there are few signs of a slowdown in the Chinese economy and the country's stock market is not so connected to the activity on the ground."
If you believe the good-natured Portuguese economist, you'd be inclined to think the ECB would hold fire when it meets on Thursday. At most, ECB President Mario Draghi might use verbal intervention, expressing vigilance over the impact of external factors (read China) on growth and inflation dynamics in the euro area.
The inflation outlook has certainly not improved towards the ECB targets, owing to the appreciation of the euro against the U.S. dollar and the continued downside pressure from falling oil prices. Although energy commodities staged a remarkable recovery last week, there are doubts as to the longevity of this rebound—crude oil prices fell again on Wednesday, after closing around 8 percent lower on Tuesday.
Despite Constancio's comments, there are economists out there who expect more explicit easing from the ECB than just a dovish message.
Those expectations were fuelled by ECB Executive Board Member Peter Praet last week when he uttered the words: "The ECB is ready to expand or extend its QE (quantitative easing) program if needed, as a slump on commodity prices and risks to global growth threaten it's inflation goal of 2 percent."
He added that the bond-purchasing was "flexible both in terms of length and composition."
According to ABN Amro, these comments "significantly increase the chances that the ECB will step up or extend QE as soon as the September meeting…"
"It (the ECB) could communicate that QE will be completely open-ended, dropping the reference to September 2016, or increase the size of monthly purchases."
Goldman Sachs' economist though believes that only "an abrupt loss of momentum" would justify an immediate reaction in the shape of an increase in monthly purchases. When it comes to an explicit extension of the program beyond September 2016, Goldman Sachs wrote that "only a downgrade of medium-term inflation outlook" would justify that.
In fact, the ECB will update it's staff projections on Thursday. It is widely expected that it will nudge down its inflation forecast, due to lower oil prices, which it had expected to bounce back in the second half of 2015.
This week's flash August inflation print came in at 0.2 percent, steady from July and dragged down once again by—guess what— energy.
Crucially though, Goldman Sachs believes the 2017 inflation outlook will be unchanged at 1.8 percent. No immediate extension of QE needed then, you would assume.
Deutsche Bank economists agreed: "The ECB is likely to refrain from announcing new measures, but remind the market that the duration of QE is conditional on the inflation outlook."
After a turbulent summer, it sounds like autumn won't be much quieter. The doves are on high alert.