ECB Review: End of APP - but stronger on rate guidance

  • The ECB announced its formal end to QE in June and not in July as we expected. This said, the announcement was as we expected, with the APP Q4 purchase rate of EUR15bn per month; hence, the bond being bought by the end of the year.
  • At the same time, the ECB stepped up its forward guidance on rates and said 'interest rates to remain at their present levels at least through the summer of 2019'. This means that we expect the first 'live' meeting to be in September 2019.
  • This does not warrant us changing our call on the first ECB rate hike being by 20bp in December 2019.

The ECB ended its APP as it is more confident on the path of inflation towards the aim. It emphasised that the strength of the economy (growth projection of 2.1% this year, still significantly above potential), well-anchored long-term inflation expectations and 'continued ample degree of monetary accommodation' are grounds to be confident on the path of inflation towards the 2% target, even after winding down QE purchases.

Mario Draghi struck a dovish tone throughout the press conference , in both the introductory statement and the Q&A. Furthermore, there remain a lot of 'ifs' in the statement (i.e. 'state dependency'), making the further reduction of QE in Q4 and first hike timing still dependent on incoming data on economic/inflation developments.

The stronger guidance on rates followed the speech by Benoît Coeuré back in February, when he said that a 'shorter purchase horizon could be combined with stronger rate forward guidance so as to mitigate the risk of investors unduly bringing forward their rate expectations'. With the wording 'the Governing Council expects the key ECB interest rates to remain at their present levels 'at least through the summer of 2019', we pay close attention to ' at least through the summer of 2019. This suggests the first 'live' meeting will be in September 2019, which makes us confident on our call for December 2019 to be the first rate hike. Draghi further said that the ECB did not discuss raising rates.

On inflation, a very interesting comment on the back of Peter Praet's comments last week was the introductory statement on 'tightening labour markets and rising wages'. The ECB does indeed seem more confident on wage dynamics - and we take note of the increased usage and focus on 'wage' compared with the past five to six years. 'Wage' has been mentioned three times now. Draghi even referred to this data as 'overlooked'.

The ECB also continued to stress the importance of the reinvestment policy as its language on the reinvestment policy was unchanged from last time, i.e. that it will reinvest 'as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation'. Overall, the ECB has become more confident on inflation, albeit there are risks to the growth outlook.

We still think the ECB will continue to be dovish, at least in the near term. Overall, markets took the introductory statement and Q&A as dovish (see intraday chart overleaf).

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