ECB Review - 'Hawkish- action - softish language
|- As expected, the ECB’s changed its forward guidance so it no longer entails the QE flexibility. President Mario Draghi struck a softish tone in the press conference, in particular as victory on inflation cannot be declared yet.
- Overall, our ECB view is not changed based on today’s events, as it included little new guidance. Importantly, the decision today was taken unanimously.
- Staff projections. The near-term growth outlook has strengthened but the ECB’s core inflation forecast remains too optimistic.
- Market reaction. The overall implication was a knee-jerk reaction, with the softish language driving yields and the EUR slightly lower, particularly the comment on inflation on declaring victory.
In line with our expectation, the ECB removed their pledge to stand ready to increase the volume if the outlook becomes less favourable. Draghi emphasised the improved economy and the change in language is a natural step to the forward guidance. Recall that this wording has been used since December 2016, when they adjusted the purchase rate from EUR80bn to EUR60bn, at a time when the economic outlook was worse than now (core inflation around 0.8-0.9% and quarterly growth rates around 0.4-0.5% back then).
On inflation we take note of Draghi saying that victory can’t be declared yet on inflation. That’s amongst the most dovish we got today. He also noted uncertainty on output growth and slack in the economy, but we do not view him to be overly concerned on this, for now. The removal of the QE easing bias reflected the stronger growth outlook and thereby also a narrowing of the convergence path in inflation. Further, the lack of bonds available for the QE programme should also be noted. ECB’s Benoît Coeuré presented the free float of eligible German bonds to be less than 10% in a speech on 23 February. We have previously argued that with deflation risk gone and strong growth fundamentals, ECB could remove the QE bias, but the first rate hike is still not a pressuring theme. We assign the key driver for the first rate hike to be the inflation – and in particular core inflation. We re-emphasise that markets should not be too focused on spot headline inflation but on core (and super-core) inflation. Further, we highlight that the decision today was taken unanimously, which is a very strong signal on the path of communication. Finally, Draghi stepped up its rhetoric on call for other institutions/governments do their job with structural reforms.
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