After Draghi significantly raised expectations at Jackson Hole that the ECB will take further action, will the Governing Council deliver on this tomorrow? We expect the following:

A dovish tone. At Jackson Hole, Draghi stated that the ECB will acknowledge the recent decline in market inflation expectations and the risks that poses. He also stated that the ECB will use all available instruments to ensure price stability. A failure to repeat the language used at Jackson Hole would be seen as a U-turn. While we don’t expect him to backtrack, words alone will disappoint expectations of new action and would suggest that Draghi has yet to win the argument on the Governing Council for new action.

Down-graded economic forecasts. Following disappointing Q2 GDP data, downbeat sentiment surveys and increasing geopolitical risks, we expect the ECB to knock at least 0.2ppt off its previous growth forecasts of 1.0%Y/Y in 2014 and 1.7%Y/Y in 2015. We also expect the ECB to forecast CPI of just ½%Y/Y in 2014 and 1%Y/Y or less in 2015. And if the ECB shifts down its 2016 CPI forecast (currently 1.4%Y/Y) that would signal a move towards further action.

New action? An increase in some measures of market inflation expectations in response to Jackson Hole should demonstrate to the Governing Council the benefits that new action – now anticipated by financial markets – could bring. Nevertheless, we think that expectations of substantive new measures this week are unrealistic, not least since the June policy initiatives have yet to be fully launched. But, if Draghi’s press conference is not to massively underwhelm tomorrow, he needs to hint at extra initiatives to come, or even announce intensified preparations for possible new measures. Among the main policy options are:

• Conventional QE: Desirable, but unlikely this week. While a new QE programme centred on purchases of sovereign bonds seems to be what Draghi is ultimately aiming for, we expect no substantive detail to be announced tomorrow. Many Governing Council members will have been surprised by Draghi’s Jackson Hole speech, and it seems too soon to announce a programme. Moreover, Draghi said in July that the ECB wanted to see the impact of the TLTROs before launching possible asset purchases. So, with the first TLTRO tender starting on 18 September, October seems the earliest possible QE launch date, with Q115 perhaps more likely. But Draghi could this week go some way to meeting the Jackson Hole hype by announcing intensified preparations for a possible QE programme.
• ABS purchases: Full detail of a modest programme likely in October. The ECB has been committed to supporting the creation of a liquid, high-quality ABS market for many months. But it is likely still to be a long way from ABS purchases actually starting. And while some sketchy detail on the programme might be forthcoming tomorrow, full details are likely no sooner than October. In any case, we expect the ABS programme to be relatively small, a mere fraction of the €1trn-plus of total asset purchases required to be a macroeconomic game-changer.
• Rate cuts: Of little benefit and relatively unlikely. Further rate cuts would bring limited benefit and would arguably contradict the ECB’s recent forward guidance. Draghi has previously stated that the lower bound for rates has “for all practical purposes been reached”, although he did allow room for further “technical adjustments”. And Draghi previously suggested that a further refi rate cut alone, to narrow the ECB’s rate corridor, would be “counterproductive for the functioning of money markets”. A further cut in the depo rate, meanwhile, would just make the implementation of QE even more tricky.
• Tweaks to the TLTROs: Possible this week, but impact limited. The removal of the 10bps surcharge over the refi rate on the cost of funds under the ECB’s TLTRO programme – which given the recent fall in market rates is looking increasingly punitive – is a more likely candidate for action at this meeting. Yet the technical guidance was already issued to banks in July, with many larger banks from the periphery having already announced their bidding intentions for phase one (tenders 1 and 2). So, any revisions to the rules of the game for the tenders this year may be difficult. For tenders in the second phase starting in March 2015, the TLTRO setup would quite easily allow for the removal of the 10bps surcharge on the refi rate. But that would simply be fiddling at the edges.

So, for Draghi not to prove a big disappointment tomorrow, he needs at least to maintain the language he used at Jackson Hole as well as provide strong hints of further action to come. Failure to do either would be bad news for euro area government bonds and good news for the euro. And it would also signal that his attempt in Jackson Hole to bounce the Governing Council into QE had failed, for now at least, leading to a general downgrading of the probability of QE that has been priced in post-Jackson Hole.