The European Central Bank has held monetary policy steady. This was widely expected with the Asset Purchase Programme (APP) not expected to end until September at the earliest (on the hawkish end of expectations) but more likely December; whilst the deposit rate is not expected to be increased from -0.4% until Q2/Q3 2019. However this was not the big news. The big news was the fact that the ECB statement has dropped its easing bias. Markets have reacted to this hawkish shift.
The focus of the wording of the statement is on two sections. Firstly the APP which is set to run until September of beyond. This will be the key section that will signal the end of the APP, but this will be for the coming months (now perhaps in June). Today though, the section about the ECB standing ready to ease further if the outlook becomes less favourable HAS BEEN DROPPED and is a key factor in the ECB moving away from its easing bias.
See below the January statement:
And now, here is today’s statement, the second section highlighted above has been removed:
This is a key move for the ECB and is a hawkish shift here which removes the easing bias and now sets them up to end the APP this year. “Asset purchases intended to run until the end of September 2018, or beyond, if necessary”. The Governing Council will now be able to monitor economic conditions (especially inflation) in the coming months. The most likely scenario with the doves still a key factor on the Governing Council would be to further taper after September (to perhaps €15bn for 3 months before ending in December). A far more hawkish move would be to end the APP in September, but at this stage this would still be unlikely.
Market reaction to the change in the statement has been:
The staff projections that are released with Draghi’s statement during the press conference but the focus will be on inflation projections and whether there will be an uptick in core inflation expectations.
Markets will also be on the lookout for how Mario Draghi responds to questions surrounding a whole raft of issues that could impact on the ECB’s ability to move away from its ultra loose monetary policy in the coming months. Draghi is likely to rebuff questions of progress towards the winding down of the ECB’s APP. However, there will be a focus on how unanimous the decision was to change the statement. Issues such as a continuation of subdued inflation, the impact of a potential trade war between the EU and the US, and uncertainty with Italian politics are sure to feature.
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