ECB Preview: Holding pattern – Nomura

Analysts at Nomura explain that policy announcements at June’s ECB meeting were more surprising in their timing than content as it made some important changes to its guidance on the Asset Purchase Programme (APP) and rates.

Key Quotes

“On the former, the ECB intends to wind down its net purchases from £30bn to £15bn in Q4 this year and cease purchases altogether from the start of 2019. Reinvestments of maturing securities are seen continuing for “an extended period of time” thereafter.”

“On the latter, the ECB’s “enhanced” guidance is for official interest rates to remain at present levels “at least through the summer of 2019”. With these announcements a long period of inaction is likely. Assuming the ECB delivers on its APP guidance then – if we are right – the next move by the ECB should be to raise the depo rate in September next year.”

“There is some uncertainty as to what the ECB actually meant by “through the summer” in the context of leaving rates on hold.”

“Elsewhere, prospects have been raised of a “twist operation” (similar to that of the Fed in 2011) whereby the ECB reinvests into longer maturity assets – while this may feature in the Q&A a direct answer from Mr Draghi may be less forthcoming.”

“Market concerns about populism, trade tensions, macroeconomic and structural imbalances (and a general unwillingness to do much to correct them), a maturing cycle and a less vibrant global backdrop are all enough to keep policymakers up at night.”

“While Mr Draghi may be coaxed into touching on some of these issues in more depth in the Q&A that follows his prepared remarks, it seems likely that the ECB’s language regarding the economic outlook will remain relatively upbeat – as it was in June (though the staff forecasts for 0.5% q-o-q growth in Q2 may well be too high – our own view is 0.4%).”

“Mr Draghi’s language at that meeting’s press conference included “substantial” progress towards a sustained adjustment in inflation, “underlying”, “solid” and “broad-based” strength in activity, and general optimism on the outlook for consumption and business investment.”

“In short, the ECB seems more confident that inflation is on a path back towards its primary objective and that the slowing in growth in the first half of this year will to at least some extent prove temporary. This is reflected in the ECB’s upbeat staff forecasts for growth (above ours for 2019 and 2020) and inflation (1.7% in each year of the forecast – the same as our own view).”