Following on from our June 8th ECB Decision Rate Preview, here is a quick take from today’s meeting:
Key Points: –
– All three key interest rates were left unchanged, as expected.
– The European Central Bank (ECB) stated that “policy rates are to remain at present levels for an extended period of time”; removing the word ‘lower’ from forward guidance.
– The governing council confirmed net purchases of EUR 60bln per month under its QE programme, affirming that it is intended to run until the end of Dec’17, or beyond if necessary.
– The ECB cut its inflation expectations, while it lifted its growth outlook.
– ECB President Mario Draghi stressed that normalisation was not discussed and that he heard “no dissent at the meeting of the Governing Council.”
Rate Decision: –
The ECB left all 3 of its key interest rates unchanged as expected, with the main refinancing rate standing at 0%, the deposit rate standing at -0.40% and the marginal lending facility at 0.25%.
Forward Guidance: –
The European Central Bank (ECB) tweaked its forward guidance, stating that “policy rates are to remain at present levels for an extended period of time;” removing the word ‘lower’ from its forward guidance. This was broadly expected.
The governing council confirmed net purchases of EUR 60bln per month under its QE programme, affirming that it is intended to run until the end of Dec’17, or beyond if necessary.
ABN Amro’s Nick Kounis suggested that such a tweak represents “a typical governing council compromise.” While Frederik Ducrozet of Pictet Asset Management noted that the tweak indicates that “the bias for QE extension stays for now (in size and/or duration) since QE, not NIRP, is the right tool to address low inflation.” Deaghi also stated that “normalisation was not discussed at all.”
Draghi was quick to note that he heard “no dissent at the meeting of the Governing Council” in the Q&A session. This is interesting as the onset of faster economic growth has led to a widening divergence of opinion on the ECB’s executive board. Chief Economist Peter Praet has warned that even incremental changes in communication could send strong signals, while Vice President Vitor Constancio argued that it is better for the ECB to be late rather than early in removing stimulus. Although Draghi did stress that the ECB needs to be patient.
JP Morgan notes that “the ECB is on a journey here, but it is a very slow one.” Draghi said as much in his most recent pre-communique reiterating that “the economic outlook is improving with downside risks moderating,” and that he remains convinced that an “extraordinary level of monetary policy support, including forward guidance is still necessary.”
Staff Macroeconomic Projections: –
The ECB cut its inflation forecasts; 2017 1.5% (Prev. 1.7%), 2018 1.3% (Prev. 1.6%), 2019 1.6% (Prev. 1.7%). Draghi noted that risks to the growth outlook are broadly balanced as the ECB upgraded its growth forecasts; 2017 1.9% (Prev. 1.8%), 2018 1.8% (Prev. 1.7%), 2019 1.7% (Prev. 1.6%). Draghi did concede that downside risks relating to global factors persist. The language around growth represented the second notable tweak, with the ECB’s previous rhetoric stating that “risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside and relate predominantly to global factors.”
The adjustments to the inflation profile were a little out of line with the latest ECB sources stories, which suggested that the central bank would trim its inflation outlook through 2019 with 2017, 2018 and 2019 CPI expected by the bank to print at around 1.5%. At 1.40% Y/Y, headline inflation is currently sitting below the ECB’s 2.0% target despite being on an upward trajectory since the middle of 2016. Core inflation, however, has been more stubborn. The sources were correct on the growth front, as the central bank revised its growth forecasts up by 0.1pp. This was after the final Q1 Eurozone GDP print came in at 0.6% Q/Q, slightly higher than the flash estimate. Nordea suggested that “the composition of GDP growth in the Euro area looks promising,” as capital formation and private consumption drove growth, although net exports dragged on growth.
Market Reaction: –
The ECB ultimately disappointed, and failed to live up to hawkish murmurings generated from the aforementioned sources stories. The EUR pared its initial pop-higher following the decision while Draghi did little to generate demand for the single currency. Bunds edged high to finish the press conference practically flat on the day.