ECB Review: Subtle shifts in tone - Nomura

Analysts at Nomura explains that the ECB announced no policy changes yesterday and nor were there any formal changes to the ECB’s forward guidance.

Key Quotes

“President Draghi confirmed the Bank’s commitment to buy EUR60bn of assets per month until at least the end of the year. And he reiterated that the pace or duration of asset purchases could be increased if needed.”

“The most noteworthy development yesterday instead concerned President Draghi’s comments on the growth outlook. Here he suggested that the eurozone’s economic recovery was increasingly solid, that downside risks had diminished and that the ECB is “moving toward a more balanced configuration”. In other words, we think the Central Bank is getting a little more confident that a process of policy normalisation may be appropriate in the coming months. However, it is not yet confident enough to offer meaningful language shifts that would convince the market that this process is imminent.”

“The question that this then begs is what will it take to convince the ECB that a policy normalisation is appropriate? The answer is a more sustained and broadly based increase in core inflation. As we have stressed, we think core inflation will rise over the next two to three months. Most of the recent dataflow tends to support that conclusion, including higher-than-expected inflation prints for April from Spain and Germany yesterday. This should pave the way for a more balanced assessment from the ECB at the next meeting on 8 June including a shift in its forward guidance. And that in turn should generate an announcement of a tapering of the QE programme at the September meeting for enactment at the start of next year. At this stage, and in line with the ECB’s communication on this matter, we do not believe that policy rates will be lifted until QE purchases have come to an end and specifically not until the latter half of 2018.”