The European Central Bank left its monetary policy settings unchanged as expected. The main refinancing rate stands at 0.00%, while the deposit and marginal lending facility rates stand at -0.40% and 0.25% respectively. The pace of QE was confirmed at EUR 60bln per month and is scheduled to run until December “or beyond, if necessary.”
The accompanying statement was a carbon copy of that issued in July’s (today’s statement is available here). Markets shrugged-off the release with the EUR edging marginally lower against both the USD and GBP, and Bunds ticking higher as German 10-year benchmark yields gave up circa 1bps.
ING’s Carsten Brzeski suggested that the “announcement illustrated that any changes in the ECB’s taper tiptoeing will be small and cautious.”
Focus immediately moved to ECB President Mario Draghi’s press conference. Noted ECB watcher, Frederik Ducrozet of Pictet Asset Management was quick to point to historical tweaks, noting that “when the ECB tasked its relevant committees to study policy options in September 2016, it wasn’t in the press release.”
Focal points heading in to the press conference were the EUR’s strength (heading into the decision the EURUSD was around 10% higher than it was at the time of June’s macroeconomic HICP forecast levels) and the potential for discussion regarding exiting the QE programme.
The most recent sources piece (released Wednesday) downplayed any concrete decision on QE being made today, suggesting that that the central bank is “unlikely a to reach decision on QE before its October meeting despite plans for informal discussion regarding the parameters around the programme.”
The first comment of note in the press conference was that “incoming information, including new projections, confirms a broadly unchanged medium-term outlook for economic growth and inflation.”
His comment put a bid into EUR, with EURUSD rising above 1.20 before it took a hit after Draghi noted that “recent exchange rate volatility represents a source of uncertainty which requires monitoring.” The currency settled at circa 1.1990, before Draghi noted that “economic expansion has yet to translate in stronger inflation dynamics. Underlying inflation remains at subdued levels.”
This caution was balanced out as the ECB upgraded its 2017 growth forecast (the full macroeconomic projections are available here), although its longer-term estimates remained unchanged. The macroeconomic projections saw an upward revision to the EURUSD assumption used in the macroeconomic forecasts, raising it to 1.18 in 2017 from 1.08 (pretty much in-line with expectations).
ECB watchers were keenly awaiting the inflation forecasts, although heading in to the press conference, ING’s Brzeski posited that “the ECB is probably not concerned about the past EUR appreciation of the euro but rather about the future appreciation.” This was borne out as the central bank made very small downward tweaks to its 2018 and 2019 inflation forecasts despite the recent bout of EUR strength. Draghi was keen to avoid currency based questions, but made a very poignant point regarding its spill over into prices, stating that “a large part of the EUR’s appreciation implicitly endogenous, hence lower pass-through.”
Gregory Daco of Oxford Economics suggested that the “latest ECB projections illustrates a difficult balancing act: stronger growth but weak inflation with the Euro acting as a trouble maker.”
Draghi preferred to remain non-committal (initially) on the timing of any monetary policy announcements, stating that “this autumn we will decide on the calibration of our policy instruments beyond the end of the year.”
ABN AMRO’s Nick Kounis summarised the initial statement:
When all was said and done the EURUSD closed the initial statement just shy of 1.2030, with Bunds relatively stable yielding just over 0.35%.
The EURUSD ran to session highs around 1.2050 in the early part of the Q&A session as Draghi confirmed that “EUR concerns were raised,” although the ECB chief also stated that the “exchange rate is not a policy target, but is important from inflation, so must be taken into account in future decisions.”
On the QE front, Draghi noted that “various scenarios” were discussed with regards to its transmission channels. Pictet’s Ducrozet suggested that this comment “hinted at possible change in QE composition.”
Draghi gave credence to yesterday’s sources piece noting that the “discussion on QE was very preliminary.” He later became more concrete on the timeline (not surprising given that Autumn only contains one further meeting), noting that the bulk of the decisions will be taken in October, but stopped short of committing to that particular meeting, stressing that he was “reluctant to commit to a QE announcement date.” ABN’s Kounis believes that this may leave the door open for the December.
In terms of what wasn’t discussed ECB Draghi revealed that the ECB “did not discuss a scarcity of bonds available for purchase” under the QE programme, also noting that “there will always be deviations from the capital key due to market liquidity considerations,” although he was quick to state that “issuer limits are not a problem” and that he remains “pretty confident that the central bank can “exploit QE’s flexibility.” Draghi also told us that “the sequencing of monetary policy was not discussed.”
Draghi was also keen to downplay any talk regarding a parallel currency issued by a Eurozone member state (do note that has been growing murmurs of such an instance coming into play in his home country of Italy), stating that “no country within the Eurozone can issue its own currency,” when questioned about the potential of any parallel currencies.
Looking forwards, Barclays baseline policy scenario remains broadly unchanged. They believe that “prudent risk management will prevent the ECB from announcing this year the tapering of QE towards zero. We therefore retain our baseline policy view and expect the ECB in October to announce the extension of its present QE programme to H118 at a reduced pace of EUR 35-40bln per month. We believe that this would be followed before June next year by a further extension of QE to H218 at a pace of EUR 15-20bln. We also expect the ECB to deliver in mid- and end-2018 depo rate hikes of 10bps.”
In terms of tapering Franklin Templeton’s David Zahn posited that “while we think it would be better to confirm sooner that tapering will begin in 2018 because markets are set up for it, in reality there’s no rush for the ECB to announce its tapering plans.” On the currency front, UBS Wealth Management are of the opinion that “EURUSD at 1.20 is a red line’ for the ECB.”
At the time of writing the EURUSD cross was hovering around 1.2020 after a brief look below 1.20 the figure, bund futures were higher, with German 10-year benchmark yields sitting just above 0.30% and peripheral bonds sitting at their tightest levels on the day when compared to their German counterparts. Global equity markets have moved away from their intra-day highs.