ECB: Carrying on as before, with no signs of panic

As generally expected, the ECB Governing Council has decided to end net bond purchases under the APP from the end of the year. Further information has been forthcoming about reinvestments: the ECB has changed its forward guidance to accentuate that it will be adhering to its reinvestment policy even after the trend reversal in interest rates has been initiated. Ultimately, though, there was nothing really new about this news – after all, no market participants had been anticipating that the ECB would tackle the task of reducing its balance sheet in advance of the first key-rate hike in the new cycle. The current consensus on this score is that this topic will only be added to the agenda in 2021 at the earliest, and maybe not until 2022. What was rather more interesting, then, was that the monetary custodians have not removed the passage about key rates being expected to be kept at their present levels at least through the summer of 2019. A large number of market actors are expecting the ECB to only tighten the monetary reins in 2020 at the earliest. Had the ECB changed its position on the interest-rate turnaround, the markets would have construed this as a very pessimistic sign. At the end of the day, the existing passage means that the central bank is keeping all its options open in any case: key rates will remain low for as long as the economic conditions require that they do. Not very surprisingly, the ECB has also revised its growth and inflation projections downwards to some extent.

 

The tenor of the press conference was that the ECB does not intend to deviate from the path which has been mapped out even though economic momentum has slackened to a noticeable extent over the past few months. Mr. Draghi argued that there are, in particular, a whole clutch of risks: geopolitical risk factors, the trade dispute, and the turmoil in certain emerging markets. These uncertainties entail downside risks and could leave a dent in cyclical activity. The unchanged key-rate trajectory, the decision to end net asset purchases as planned, and the fact that risks to the economic outlook continue to be seen as broadly balanced imply that the ECB does not wish to overemphasise the recent bout of slower economic activity. At the same time, Draghi has attempted to relativise the, in some cases, highly pessimistic expectations of journalists and to avoid causing unnecessary insecurity. The low level of key rates and the high volume of government-bond holdings should underpin economic growth and lead to higher inflation rates. If things work out differently, Draghi argued that the ECB has the necessary instruments enabling it to act. In this connection, the ECB president stressed that bond purchases, in his view, are now part of the central bank’s standard toolkit.

In summary, Mr. Draghi has managed to prevent the markets from getting in a tizzy by underlining that the ECB remains prudent and its monetary stance expansionary. Draghi’s remark “continuing confidence and increasing caution” puts the message of the press conference pretty much in a nutshell.

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