The market’s base-case scenario was for ECB President Draghi to manage expectations by keeping a balanced approach to latest developments in the euro area and abroad, with no significant change in forward guidance, which was confirmed by the fact that overnight volatility in the euro trading at its second lowest reading before an ECB meeting in the past year.
As Bloomberg’s Carolynn Look noted, top on everyone’s mind today is future policy and what clues fresh economic forecasts and even the slightest change in wording might offer. Draghi is likely to err on the side of caution. Although the ECB previously hinted that forward guidance could be changed “early” this year — paving the way for a gradual exit from bond buying — market anxiety over sooner-than-anticipated tightening by global central banks has already caused plenty of volatility. Economists expect Draghi to keep a tight lid on additional changes, for now.
Ahead of the statement, money markets are signaling an increasingly dovish ECB stance, with bets on a 10 basis point hike in the deposit rate pushed back to the second quarter of next year.
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The ECB statement confirms no change to its key rates:
*ECB LEAVES DEPOSIT FACILITY RATE UNCHANGED AT -0.4%
*ECB LEAVES MAIN REFINANCING RATE UNCHANGED AT 0%
And forward guidance
*ECB SEES INTEREST RATES AT PRESENT LEVELS FOR EXTENDED PERIOD
*ECB SEES RATES AT PRESENT LEVELS WELL PAST END OF NET PURCHASES
But The ECB went a little more hawkish on its QE program…
*ECB SEES QE RUNNING UNTIL END OF SEPTEMBER OR BEYOND IF NEEDED
*ECB: QE TO RUN UNTIL INFLATION PATH HAS SUSTAINABLY ADJUSTED
*ECB WILL REINVEST MATURING DEBT FOR AS LONG AS NECESSARY
*ECB WILL REINVEST FOR EXTENDED PERIOD AFTER NET BUYING ENDS
*ECB SAYS REINVESTMENTS WILL HELP DELIVER APPROPRIATE STANCE
The ECB dropped its pledge to “increase the asset purchase program in terms of size and/or duration” if necessary — suggesting they want to define a clearer path for the direction of stimulus. By removing the so-called easing bias on QE, they’re showing more confidence that they’ll be able to phase the program out.
Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the new monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.
If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration. The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.
The ECB has left all three rates unchanged as expected but was overall hawkish, by tweaking the press release language and removing the easing bias on asset purchases.
EURUSD is spiking on the statement…
As are Bund yields…
Bloomberg’s Carolynn Look does however point out that it’s not a huge change. They still say that QE will run for as long as is necessary to meet the ECB’s inflation goal. They also kept their guidance on interest rates the same. And frankly, I haven’t heard of anyone who actually expected them to increase QE again this year.
As a reminder, here is ING’s cheat sheet for trading the statement and the press conference…