ECB: Balancing a better situation with a dovish hawkish move – Natixis

Jean-François Robin, Research Analyst at Natixis, suggests that if there is a deterioration in the macro situation, the ECB would adjust the size and duration of QE, not interest rate levels, as Mario Draghi has explained that the ECB stands ready to increase the Asset Purchase Programme if the outlook becomes less favourable.

Key Quotes

“It seems. therefore, that the ECB now favours adjusting this programme if some tweaking is needed (Mario Draghi refers to an APP bias).”

“A rise in interest rates is not on the cards any time soon, especially since the inflation forecasts were revised downwards (just 1.6% expected in 2019, when the ECB defines price stability at inflation rates below 2%, which is the case, but close to 2%, which is not really the case). We are still some way off meeting the ECB’s four official criteria for raising interest rates, which are that:

• inflation rates are below, but close to, 2% over the medium term
• inflation can be self-sustaining without any help from monetary policy
• inflation is steady and lasting
• the desired level is achieved at the level of the Eurozone not just a single country.”

“Our current scenario, being that there will be no interest rate hike before 2019, remains valid.”

“Nevertheless, Mario Draghi did seek to minimise the revision of the inflation forecasts. His assessment was that the downward revisions were rather modest in fact and due essentially to energy prices. In other words, nothing much has changed. For Mario Draghi, the real issue is core inflation, which remains weak, probably because of the slight wage growth, but his view is that this is mitigated by the fact there has been no deterioration of the core CPI, which remains at the same level as in December. In passing, this underlines the increasing importance given to this measure of inflation.... which is set to pass above the headline CPI in 2018 and 2019 despite the slight revision.”

“In short, as said by Mario Draghi, more patience is needed.

ECB removed its rates bias but kept its QE bias for now. That’s it nothing more for now. Barring  a major market mover or a new black cloud gathering on the horizon, the 20 July meeting should be a pure formality. The next really key meeting should be the one on 7 September, when new growth and inflation forecasts will be released. Also, more should be known then about the QE trajectory. Our view is that the ECB will announce then that the QE tapering will get under way at the start of 2018.”