The ECB announced on Thursday it would continue to make net purchases under the asset buying programme at the current monthly pace of €30bn until the end of September 2018. In October, the central bank will halve the monthly pace to €15bn until the end of December 2018 when the net purchases will end.
The bank also decided at its regular monthly meeting that would leave all its other main interest rates unchanged. It said it expected interest rates to remain at their current levels until the second half of next year.
“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path,” it said in a statement.
After the ECB’s announcement, Fidelity International, M&G Investments, Legal & General Investment Management (LGIM), and State Street all noted the central bank’s dovish tone on the rates outlook which Fidelity found “unnecessary”.
Fidelity’s multi asset portfolio manager, Nick Peters, said he was surprised that ECB president Mario Draghi pre-committed not to hike rates until September 2019 at the earliest.
“This is surprising for a couple of reasons. First, the ECB now forecasts inflation at 1.7% in all of 2018, 2019 and 2020. To most, this would seem to qualify as meeting their target of ‘close to, but below, 2%’,” Peters said.
“Second, extrapolating the steady fall in unemployment the Eurozone has now enjoyed for many years, the U-rate will be back at 2007’s low levels by the time the ECB hikes for the first time this cycle.”
Static rates outlook
LGIM senior European economist, Hetal Mehta, said: “The ECB has deliberately given itself a great deal of ‘optionality’ but it looks like rates are still likely to be negative at the end of Draghi’s tenure”.
Franklin Templeton’s head of European fixed income, David Zahn said if the ECB tightened QE quickly and the economy were to slow, this could exacerbate the slowing.
“Whereas if it proceeded more slowly, and the economy were to pick up, the bank can easily accelerate its rate hikes,” he said.
Zahn also said that if Draghi were to set the ECB on the tightening path it would constrain whoever succeeded him.
“We feel the ECB is unlikely to start increasing interest rates until the new ECB president is firmly in place… In our experience, central bankers in general don’t like to prescribe what path their successors should follow,” he said.
DWS chief investment officer, Stefan Kreuzkamp, said it made sense that the bank considered its progress towards their ‘close to but below 2%’ inflation target as “substantial” due to the “background of uncertainties in the world today – such as trade – this makes sense, as does the emphasis on data dependency”.
Noting trade tensions and increased volatility, Hermes senior economist, Silvia Dall’Angelo suggested that the ECB’s plan for the final stages of monetary policy normalisation might end up being shelved before they were given serious consideration.
“The ECB will likely replicate the steps taken by other major central banks at more advanced stages of the normalisation cycle over the next few years,” Dall’Angelo said.
“…the eurozone would not be immune to a slowdown in the US, where the business cycle is at a later stage and the vulnerability to policy errors is higher.”
In line with expectations
Prior to today’s meeting, Columbia Threadneedle Investment’s head of global rates and currency Adrian Hilton said it would not matter much if the ECB had not decided on a precise date to end QE.
Hilton said: “The most potent monetary policy tool right now is the guidance they give around the full reinvestment of maturing QE assets and, in due course, the timing of the first rate hike,” he said.
No Italian impact
He added that recent developments in Italian politics and asset prices posed new risks to the euro area and that markets would have to get used to permanently higher levels of volatility.
“But so far, the ECB does not appear to see the disruption as sufficient to derail its slow, steady policy normalisation,” he said.
“If Italian risks can be kept at bay, then above-trend growth and gently recovering inflation should allow for rates to go up a year or so from now.”