It did not come as much of a surprise that the ECB reaffirmed at yesterday’s Governing Council meeting that it is only intending to raise policy rates at the earliest from the summer of 2019 onwards. At the same time, the central bank finally announced that it will be reducing the monthly pace of net asset purchases from EUR 30 billion to EUR 15 billion from October of this year onwards. The ECB is also planning to end net purchases in December, although this option is still subject to incoming data confirming the central bank’s medium-term inflation outlook. Ultimately, then, it was left open when net purchases will be discontinued. We are assuming, though, that the ECB would be facing a very high hurdle if it was to deviate from the path which has been mapped out. The monetary custodians will be continuing to operate their reinvestment policy for the time being. On the whole, financial markets scarcely reacted to either the ECB Governing Council meeting or to the subsequent press conference held by the ECB President. This implies that the market is adequately anticipating the central bank’s slow exit from its ultra-expansionary monetary policy. What is more, the opinion prevalent among market participants is that the monetary-policy stance is set to remain highly accommodative.
The ECB declined to vouchsafe any further details about its reinvestment policy. Draghi conceded at the press conference that the monetary custodians have not even discussed their reinvestment strategy. The ECB is obviously in no hurry to publish new information about the reinvestment issue. Accordingly, Draghi also parried speculation that the central bank may be looking to buy longer-dated government bonds. The ECB President did, however, emphasise that the ECB’s capital key remained the anchor on the reinvestment front. Inflation is likely to gain momentum in the medium term given the fact that capacity utilisation is high at present and labour-market conditions are improving steadily. In this connection, Draghi went on record as saying that his committee is projecting slightly lower oil prices but significantly stronger core inflation. Many questions were asked about Italy. In this regard, Draghi remarked that the risks to financial markets emanating from Italy’s economic policy have not, as yet, created much of a spillover to other euro area countries. He likewise expressed confidence that the government in Rome will stick to its current position and respect the rules laid down by the European Commission. In summary, political questions on Italy received decidedly evasive answers.
The ECB’s projections for inflation remained unchanged: the central bank assumes that inflation will be running at around 1.7% in the coming years, thereby voicing its confidence that its monetary policy is going to provide a stable trend. Overall, growth projections were only revised down marginally; since news about the impending downward revision had already leaked out in previous days, the markets were not taken by surprise by this step. Waning global demand is probably the reason why the growth forecast was slightly lowered. In Draghi’s opinion, the risks deriving from trade restrictions or from uncertainties with their origins in emerging markets have gained in relevance. All the same, even though the ECB President foregrounded such risks on several occasions, they are evidently not (yet) sizeable enough to cause the ECB to shift its monetary-policy stance. The growth outlook thus continues to be broadly balanced. In this connection, Draghi stressed at the press conference that there were downside risks, but also upside opportunities of growth accelerating. The ECB boss therefore walked his audience through a press conference containing no surprises. Since the existing monetary-policy stance was confirmed, financial markets barely reacted.