The ECB on track to end QE

  • Asset purchases to be halved since September

  • No changes in interest rate forward guidance

As widely expected, at today's monetary policy meeting there were no changes in the ECB's monetary policy stance, as the central bank left key interest rates unchanged and reiterated that it expects 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." Regarding the asset purchase programme (APP), the central bank confirmed that, after September 2018, the monthly pace of net asset purchases will be reduced to €15 billion until December 2018, and reaffirmed that they will then end the programme, contingent upon incoming data. Moreover, the governing council reiterated its intention to reinvest the proceeds of maturing bonds "for an extended period of time after the end of net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation". The dovish tone remains as Mr Draghi stated that "significant monetary policy stimulus is needed."

The ECB maintains its assessment of an ongoing broad-based expansion in the euro zone supported by the strength of domestic demand. Mr. Draghi downplayed recent disappointing data, as activity approaches steady growth rates after the rebound observed in the second half of last year. This, along with tightening labour markets, is pushing up wage growth and underpins the ECB's view of a gradual upward trend in core inflation in the coming quarters. This scenario is reflected in minor changes in the updated forecasts. GDP growth has been revised slightly downwards by 0.1 pp to 2% in 2018 and 1.8% in 2019 driven by weaker foreign demand, but remains at 1.7% in 2020. The outlook for inflation remains unchanged, holding steady at 1.7% over the forecast horizon. The easing base effects of energy prices in the coming months should be offset by the gradual increase in core inflation from the end of the year (slight downward revision of 0.1 pp to 1.5% in 2019 and 1.8% in 2020). Mr. Draghi stressed that all members of the Governing Council agreed that the risks to the growth outlook are broadly balanced (unchanged from previous month's assessment), as more prominent risks on protectionism and emerging markets should be offset by upside domestic risks stemming from less neutral fiscal policy in some members states and the improvement in the labour market and wages.

All in all, the ECB is on track to end QE but refrained from giving new clues on the next steps on the path to normalisation; in particular Mr Draghi stressed that it is premature to talk about rate hikes. In the coming months the focus will be on knowing how reinvestment policy will be instrumented and when and at what pace interest rates will rise. So far, the ECB seems comfortable with markets expectations; hence, they are not in a hurry to make any change in its forward guidance.


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