The ECB delivers on QE exit and gives strong guidance on rates

  • The Asset Purchase Programme will end in December 2018.
  • However, interest rates will remain on hold at least until the summer 2019, later than expected.
  • Macro projections were revised in line with expectations: GDP down in 2018 to 2.1% and inflation up in 2018 and 2019 to 1.7%.

At today´s meeting, the ECB unveiled very specific details of monetary policy normalization. As regards nonstandard measures, the central bank decided to reduce monthly asset purchase programme (APP) after September to €15 and ending the programme in December 2018. No changes in the reinvestment of the principal of the securities purchased under the APP, i.e to be maintained for an extended period after the end of the net purchases, for as long as necessary.

Regarding standard measures, key interest rates were left unchanged, as expected, while the ECB, unexpectedly, strengthened its forward guidance on rates announcing that “the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path,” instead of its previous pledge to keep them unchanged until “well past” the horizon of the net asset purchases. This way, the ECB has given priority to anchoring interest rates expectations to ensure that monetary conditions do not tighten, while losing some flexibility for the coming year.

The ECB’s assessment of the economic outlook remains broadly unchanged, but now it is more confident of the sustained upward trend in underlying inflation over the forecast horizon. This is supported by the solid and broad-based recovery, but also by the fact that inflation expectations remain well anchored despite the fact that markets have been pricing the end of the QE by year end for some time now.

The updated GDP growth forecasts are weaker in 2018 (-0.3 pp to 2.1%) due to the slowdown in the first quarter (partly because of temporary factors and the pause after very high growth in 2H17), but remain unchanged in 2019- 20 (1.9% and 1.7%, respectively). Robust global demand and a more depreciated euro should offset the negative effect of higher oil prices on activity. However, these changes in oil prices and the exchange rate have led the ECB to revise its headline inflation forecasts upwards by 0.3 pp to 1.7% for both 2018 and 2019, while core inflation has also been revised slightly upwards by 0.1 pp in 2019 and 2020 to 1.6% and 1.9%, respectively. Despite risks to economic growth being balanced, according to the statement,

Mr. Draghi highlighted the “unquestionable increase” in global (protectionism and geopolitical) and domestic (Italy) uncertainty in recent weeks, so that monetary policy decisions will remain data-dependent over the coming months. Mr. Draghi said that today’s decisions were taken unanimously, emphasizing that the Governing Council (GC) was unanimous about maintaining “optionality” on all parts of the decisions. The tone remained dovish; the easing bias was retained as the central bank reiterated that it “stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards the GC’s inflation aim in a sustained manner.” In particular, he took the opportunity to make clear that the APP is not disappearing, emphasizing that it will remain as a normal instrument of monetary policy. Moreover, the GC stressed that significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.

Overall, the ECB has announced the end of the QE, as expected. However, the central bank also unexpectedly gave explicit rate path guidance, keeping rates steady at least through next summer. Against this background, we expect a delay in the hiking cycle relative to our previous scenario (by March 2019 the first depo hike and by June 2019 the first refi rate hike). In any case, today the ECB has taken another important step in the normalization process of its monetary policy.

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