Taking the spotlight
26 June 2018
After a meeting in Riga, the European Central Bank has revealed it is going to start reducing the volume of bonds it buys under its asset purchase programme
Image: Shutterstock
After a Governing Council of the European Central Bank (ECB) meeting on 14 June in Riga, the ECB is going to start reducing the volume of bonds it buys under its asset purchase programme and it expects interest rates to stay at current levels at least through the summer of 2019.
For the formal record, the official line is that the Governing Council undertook a careful review of the progress towards a sustained adjustment in the path of inflation. It also took into account the latest Eurosystem staff macroeconomic projections, measures of price and wage pressures, and uncertainties surrounding the inflation outlook.
Based on this review the Governing Council made the following decisions: first, as regards to non-standard monetary policy measures, the Governing Council will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of €30 billion until the end of September this year. The Governing Council anticipates that, after September, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.
Second, the Governing Council intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Third, the Governing Council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at zero percent, 0.25 percent and -0.40 percent, respectively. The Governing Council expects the key ECB interest rates to remain at their present levels to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.
ECB vice-president, Luis de Guindos, said in his opening remarks to the press conference that followed in Riga: “The risks surrounding the euro area growth outlook remain broadly balanced. Nevertheless, uncertainties related to global factors, including the threat of increased protectionism, have become more prominent. Moreover, the risk of persistent heightened financial market volatility warrants monitoring.”
It added that the monetary policy decisions maintain the current ample degree of monetary accommodation that will ensure the continued sustained convergence of inflation towards levels that are below, but close to, 2 percent over the medium term.
Reaction was immediate and widespread. Bill Blain, head of capital markets and alternative assets at Mint Partners, admitted he called the result of the Russia versus Saudi Arabia opening match in the 2018 FIFA World Cup, and said in his regular Morning Porridge commentary: “I was equally wrong when I predicted ECB President Mario Draghi would prevaricate, dither and kick the quantitative easing can further down the road following yesterday’s Riga ECB meeting.”
“Nope. The ECB took a decision! Draghi made clear the €30 billion programme ends by December and the buying will be scaled back in the final quarter.”
“I was expecting more mumble-swerve about data dependency and such. On the other hand, his decisiveness on quantative easing (QE) was neatly balanced by an absolute blank retiming guidance on when the ECB is going to start hiking rates.”
“Summer 2019? Maybe, maybe not. It was a masterclass in both give and take, playing to his political masters in Brussels and his financial benefactors in Berlin. Bravissimo!”
Mati Greenspan, senior market analyst at the eToro social trading platform, also dragged football into his own mix of comments.
He said: “It was a perfect play by the ECB. They’ve been worrying for months about the strength of the euro and finally, in the 90th minute, they managed to pull off a power play that brought the ball all the way to the goal line.”
“The timing was impeccable. On Wednesday [13 June], the ECB’s counterpart in the US announced a more aggressive monetary policy and plans to raise their interest rates more rapidly than expected. At the same time, a decision was expected from the ECB to end their ‘money printing’ stimulus package very soon.”
“During the press conference, the ECB not only confirmed the market’s expectations by announcing an end to the stimulus as of September, but they also surprised everyone by indicating that they will not be raising their interest rates until the summer of 2019.”
“See, while everyone was concentrating on the striker (stimulus) and expecting him to kick the ball into the goalkeeper’s hands, he actually kicked it to his teammate (interest rates) who nobody was watching.”
“They haven’t quite won the match just yet though. Looking at the chart of the Euro/US dollar, we can see that they failed to carry the euro below the critical level of $1.15 and therefore any further downward pressure will be difficult to maintain.”
Timothy Graf, head of macro strategy for Europe, the Middle East and Africa at State Street Global Markets; and Brendan Lardner, active fixed income portfolio manager at State Street Global Advisors, offer their views.
Graf commented: “No alarms and not too many surprises other than quite dovish forward guidance on rates from the ECB. Going into the meeting, markets were expecting some hint that their QE programme would start to wind down at some stage this year—we now have confirmation that QE will end in December.”
“Looking ahead, the ECB does not have an easy task in setting policy for the medium to long term. Growth and inflation conditions are much improved, but more evidence is needed to see if the Q1 slowdown was, indeed, temporary—a very difficult judgement to make. For that matter, core inflation is still a long way from the ECB’s target of ‘below, but close to, two percent’.”
Lardner added: “The ECB delivered a mixed message. The announcement that they intend to wind down asset purchases by the end of the year ties in with the recent comments from the central bank.”
“The ECB is clearly willing to overlook recent weaker growth data from the Eurozone, focusing instead on the inflation outlook, which has improved as indicated by the upward revisions in ECB staff forecasts.”
“In the ECB’s view, the criteria it has set to end QE has been met. It could also be read that the ECB wished to end its asset purchase programme as early as possible so as not to be seen to be adjusting purchases due to political considerations.”
“Against the somewhat hawkish implication of the ending of asset purchases, they looked to counter this with more dovish comments on the path of rates going forward, and on the reinvestment of maturing ECB bond holdings.”
“Rates were left unchanged and the ECB announced their intention to leave them as such at least through summer 2019. This may indicate that the first hike might not be until September 2019, on balance a little later than the market had been expecting. The initial market reaction has been for a weakening of the euro and a fall in core bond yields as the market re-prices the policy path.”
For the formal record, the official line is that the Governing Council undertook a careful review of the progress towards a sustained adjustment in the path of inflation. It also took into account the latest Eurosystem staff macroeconomic projections, measures of price and wage pressures, and uncertainties surrounding the inflation outlook.
Based on this review the Governing Council made the following decisions: first, as regards to non-standard monetary policy measures, the Governing Council will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of €30 billion until the end of September this year. The Governing Council anticipates that, after September, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.
Second, the Governing Council intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Third, the Governing Council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at zero percent, 0.25 percent and -0.40 percent, respectively. The Governing Council expects the key ECB interest rates to remain at their present levels to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.
ECB vice-president, Luis de Guindos, said in his opening remarks to the press conference that followed in Riga: “The risks surrounding the euro area growth outlook remain broadly balanced. Nevertheless, uncertainties related to global factors, including the threat of increased protectionism, have become more prominent. Moreover, the risk of persistent heightened financial market volatility warrants monitoring.”
It added that the monetary policy decisions maintain the current ample degree of monetary accommodation that will ensure the continued sustained convergence of inflation towards levels that are below, but close to, 2 percent over the medium term.
Reaction was immediate and widespread. Bill Blain, head of capital markets and alternative assets at Mint Partners, admitted he called the result of the Russia versus Saudi Arabia opening match in the 2018 FIFA World Cup, and said in his regular Morning Porridge commentary: “I was equally wrong when I predicted ECB President Mario Draghi would prevaricate, dither and kick the quantitative easing can further down the road following yesterday’s Riga ECB meeting.”
“Nope. The ECB took a decision! Draghi made clear the €30 billion programme ends by December and the buying will be scaled back in the final quarter.”
“I was expecting more mumble-swerve about data dependency and such. On the other hand, his decisiveness on quantative easing (QE) was neatly balanced by an absolute blank retiming guidance on when the ECB is going to start hiking rates.”
“Summer 2019? Maybe, maybe not. It was a masterclass in both give and take, playing to his political masters in Brussels and his financial benefactors in Berlin. Bravissimo!”
Mati Greenspan, senior market analyst at the eToro social trading platform, also dragged football into his own mix of comments.
He said: “It was a perfect play by the ECB. They’ve been worrying for months about the strength of the euro and finally, in the 90th minute, they managed to pull off a power play that brought the ball all the way to the goal line.”
“The timing was impeccable. On Wednesday [13 June], the ECB’s counterpart in the US announced a more aggressive monetary policy and plans to raise their interest rates more rapidly than expected. At the same time, a decision was expected from the ECB to end their ‘money printing’ stimulus package very soon.”
“During the press conference, the ECB not only confirmed the market’s expectations by announcing an end to the stimulus as of September, but they also surprised everyone by indicating that they will not be raising their interest rates until the summer of 2019.”
“See, while everyone was concentrating on the striker (stimulus) and expecting him to kick the ball into the goalkeeper’s hands, he actually kicked it to his teammate (interest rates) who nobody was watching.”
“They haven’t quite won the match just yet though. Looking at the chart of the Euro/US dollar, we can see that they failed to carry the euro below the critical level of $1.15 and therefore any further downward pressure will be difficult to maintain.”
Timothy Graf, head of macro strategy for Europe, the Middle East and Africa at State Street Global Markets; and Brendan Lardner, active fixed income portfolio manager at State Street Global Advisors, offer their views.
Graf commented: “No alarms and not too many surprises other than quite dovish forward guidance on rates from the ECB. Going into the meeting, markets were expecting some hint that their QE programme would start to wind down at some stage this year—we now have confirmation that QE will end in December.”
“Looking ahead, the ECB does not have an easy task in setting policy for the medium to long term. Growth and inflation conditions are much improved, but more evidence is needed to see if the Q1 slowdown was, indeed, temporary—a very difficult judgement to make. For that matter, core inflation is still a long way from the ECB’s target of ‘below, but close to, two percent’.”
Lardner added: “The ECB delivered a mixed message. The announcement that they intend to wind down asset purchases by the end of the year ties in with the recent comments from the central bank.”
“The ECB is clearly willing to overlook recent weaker growth data from the Eurozone, focusing instead on the inflation outlook, which has improved as indicated by the upward revisions in ECB staff forecasts.”
“In the ECB’s view, the criteria it has set to end QE has been met. It could also be read that the ECB wished to end its asset purchase programme as early as possible so as not to be seen to be adjusting purchases due to political considerations.”
“Against the somewhat hawkish implication of the ending of asset purchases, they looked to counter this with more dovish comments on the path of rates going forward, and on the reinvestment of maturing ECB bond holdings.”
“Rates were left unchanged and the ECB announced their intention to leave them as such at least through summer 2019. This may indicate that the first hike might not be until September 2019, on balance a little later than the market had been expecting. The initial market reaction has been for a weakening of the euro and a fall in core bond yields as the market re-prices the policy path.”
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