ECB will continue to be dovish, at least near-term

Today the European Central Bank announced the end of the QE program in December. According to analysts from Danske Bank noted that the central bank stepped up its forward guidance on rates and said ‘interest rates to remain at their present levels at least through the summer of 2019’. They see the first ‘live’ meeting to be in September 2019.

Key Quotes:

“The ECB ended its APP as it is more confident on the path of inflation towards the aim. It emphasised that the strength of the economy (growth projection of 2.1% this year, still significantly above potential), well-anchored long-term inflation expectations and ‘continued ample degree of monetary accommodation’ are grounds to be confident on the path of inflation towards the 2% target, even after winding down QE purchases.”

“Mario Draghi struck a dovish tone throughout the press conference, in both the introductory statement and the Q&A. Furthermore, there remain a lot of ‘ifs’ in the statement (i.e. ‘state dependency’), making the further reduction of QE in Q4 and first hike timing still dependent on incoming data on economic/inflation developments.”

“With the wording ‘the Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019’, we pay close attention to ‘at least through the summer of 2019’. This suggests the first ‘live’ meeting will be in September 2019, which makes us confident on our call for December 2019 to be the first rate hike.”

“The ECB also continued to stress the importance of the reinvestment policy as its language on the reinvestment policy was unchanged from last time, i.e. that it will reinvest ‘as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation’.

“The ECB has become more confident on inflation, albeit there are risks to the growth outlook. We still think the ECB will continue to be dovish, at least in the near term. Overall, markets took the introductory statement and Q&A as dovish”.

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