ECB left its policy stance and communication unchanged

The ECB Governing Council left its policy stance and communication unchanged at the September meeting. Today’s press conference contained few surprises. Overall, the results of the meeting were broadly in line with our and broad market expectations. Mr. Draghi described the economic expansion as ongoing and broad-based, and indicated that incoming data were largely consistent with the scenario underlying the policy outlook set out in the summer. The updated staff macroeconomic projections confirm this, embodying modest negative revisions to growth in 2018-19, but an unchanged profile for headline inflation. The Governing Council continues to view risks around its assessment of the economic outlook as balanced. While Mr. Draghi reiterated that global factors continue to weigh on the downside, he viewed the underlying strength of the domestic economy as acting to balance risks overall. No new information was offered regarding the approach that will be taken to reinvesting the proceeds of maturing bonds in the APP portfolio, but Mr. Draghi indicated that some discussion will take place by year-end. With little news today, we maintain our base case forecast that the APP will end by end-year and the first hike will come in Q4 2019.

The Introductory Statement showed that the ECB maintains a broadly robust view on economic growth. The expansion is seen as ongoing and broad-based. The Governing Council interprets recent indicators as confirming this, despite their slowing from the strong performance seen in 2017 H2. Mr. Draghi noted negative impact of external factors, but argued the domestic economy continued to show strength.

On inflation, the Introductory Statement was broadly unchanged from July, stating that “while measures of underlying inflation remain generally muted, they have been increasing from earlier lows” and “domestic cost pressures are strengthening amid high levels of capacity utilisation and tightening labour markets”. Underlying inflation is still expected to increase gradually over the medium term supported by the ECB’s monetary policy measures. Mr. Draghi emphasised that the uncertainty surrounding the inflation outlook is declining. The updated staff macroeconomic projections made few changes to the inflation forecast, with headline inflation unchanged at +1.7% for the coming three years. The published staff macroeconomic forecast shows a 10bp downward revision to core inflation in 2019 and 2020 (to +1.5% and +1.8%, respectively).

 The path of net asset purchases under the APP laid out in June embodies a fall in the pace to EUR15bn per month in October, November and December before purchases cease at year-end. This plan was reaffirmed at the September meeting: purchases will fall to EUR15bn as of the end of this month. Purchases are still expected to cease by year-end, subject to incoming data. No further details on reinvestments of the APP were given at today’s meeting. Mr. Draghi indicated that some discussion was due before year-end. Mr. Draghi again stressed that the capital key is the anchor of the APP.

 The forward rate guidance remains unchanged. The Introductory Statement reaffirms – in its ‘date dependent’ guidance – that the ECB expects policy rates to remain at their current levels “at least through the summer of 2019”. The current guidance still offers flexibility in terms of what will happen after the summer next year – the Governing Council maintains a ‘state dependent’ rate guidance , indicating that rates will be on hold for as long as necessary to ensure the continued sustained convergence of inflation.

Mr. Draghi received some questions on Italy, as expected. Here Mr. Draghi said that one has to wait for the facts, which are the draft budget law and the subsequent parliamentary discussion. Mr. Draghi noted that key Italian ministers – the Prime Minister, the Finance Minister and the Foreign Minister – had all said they would respect EU rules.

 With little new information offered at today’s press conference, our view remains unchanged. We expect the APP to finish by end-2018. The bar for deviating from the Governing Council’s guidance on the pace and end-date of the APP seems high. We expect the first rate hike to come in Q4 2019. We expect the first hike to be 20bp. Once the ECB starts to hike, we expect an annual pace of hikes of around 40bp-50bp.