ECB: Expect no change in policy rates or asset purchases in 2017 – Goldman Sachs

Analysts at Goldman Sachs see Mr. Draghi’s speech at Sintra as a broad continuation of his previous comments updated to reflect ongoing developments, rather than a sharp switch in the policy signal and as a result expects no change in policy rates or asset purchases for the remainder of 2017.

Key quotes

“Mr. Draghi’s Sintra speech has many similarities with his April speech at the ECB Watchers’ conference: Mr. Draghi highlighted that the ECB’s monetary policy is working to lift the economy (this provides a rational for past action, but also for continued accommodation in a low-inflation environment) and inflationary dynamics continue to depend on ongoing monetary policy support. The Reuters story would seem to support such an interpretation. The market seemed to focus on Draghi’s comments on reflation, which when taken out of context appear hawkish (even if not new). Rather, his speech should be seen as a whole with his comments on persistence and prudence providing a counter-weight. We also interpret Mr. Draghi’s comments in the context of our own forecast (of low domestic inflationary pressures and no further acceleration in economic activity). On our economic base case, Mr. Draghi’s comments do not suggest a need for a hawkish shift in policy.”

“The relatively sizeable market moves raises the question whether the ECB will view this as an ‘unwarranted’ tightening of financial conditions that requires a policy response. We do not think that the ECB will be too concerned about recent price action in longer-dated Bund yields. Yields have been depressed and remain within its range observed so far this year. Higher yields may reflect an expectation of higher future growth. We see the ECB as having greater concern for an appreciating EUR vis-a-vis the USD, especially in the context of a market which is increasingly doubting the Fed’s scope to raise rates further. The EUR/USD has reached its highest level so far this year.” 

“Given our interpretation of Mr. Draghi’s speech and other comments at the Sintra conference, we leave our forecast of ECB policy unchanged. This includes that we expect no change in policy rates or asset purchases for the remainder of 2017. We expect the ECB to taper its asset purchases gradually during 2018 (with an announcement of this sometime in the autumn). We do not expect a rate hike until 2019 (even if risks are skewed to an earlier hike should economic growth and inflation surprise positively relative to our expectations).”