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PATRIS MACRO - Eurozone - Key takeaways from September ECB meeting

13 Sep 2018

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Key takeaways from September ECB meeting:

Bottom line: As was widely expected, there was no change in ECB guidance, ahead of 4Q18 taper, with the ECB reaffirming, nevertheless, that it is ready to adjust all instruments if needed.

The ECB published new staff projections. Forecasts for real GDP growth in 2018-19 were revised downwards modestly, reflecting external developments, in line with expectations. The ECB still projects a significant acceleration in core inflation over coming years. Nonetheless, forecasts for 2019 and 2020 were both cut by 0.1pp to 1.5% and 1.8%, respectively.

Mario Draghi said that the Governing Council didn´t discuss the reinvestment strategy, and noted that there are two more ECB meetings before the end of the year. The ECB sees economic data as confirming the previous assessment of an ongoing and broad-based economic growth. On inflation, the ECB recognised that domestic cost pressures are strengthening and broadening, reflecting high capacity utilization and a tighter labour market. Therefore, the ECB sees uncertainty around the inflation outlook as receding.

Details:

1.The ECB disclosed that the private sector working group recommended the euro short-term ESTER as alternative euro risk-free rate and replacement for EONIA.

2.The press release was unchanged compared to the July meeting. Interest rates were kept unchanged and the Governing Council sees present levels as adequate at least through the summer of 2019, and in any case for as longer as needed to ensure the continued sustained convergence of inflation to below but close to 2%. Net purchases will continue at a €30bn monthly pace until the end of September. After September, asset purchases will be reduced to a €15bn monthly pace, and then end, subject to data confirming the medium-term inflation outlook. Reinvestments will continue for an extended period of time after the end of net asset purchases, and as long as necessary to maintain an ample degree of monetary accommodation.

3.The Introductory Statement showed that the ECB sees economic data as confirming the previous assessment of an ongoing and broad-based economic growth. Inflation convergence is expected to continue even after the end of QE, although significant stimulus is still seen as necessary to support inflation. Risks to the economic outlook continue to be seen as broadly balanced, despite acknowledging that trade and EM risks have gained more prominence recently. Inflation is expected to remain around current levels for the rest of the year. Nevertheless, the ECB recognises that domestic cost pressures are strengthening and broadening, reflecting high capacity utilization and a tighter labour market. Therefore, the ECB sees uncertainty around the inflation outlook as receding. Measures of underlying inflation continue to be seen as remaining generally muted, but the ECB still expects a gradual pick-up towards year-end and in medium-term.

4.The updated ECB staff macroeconomic projections for the region showed slight downward revisions for real GDP growth in 2018 (from 2.1% in June to 2.0%) and 2019 (from 1.9% to 1.8%), reflecting weaker external demand. Headline HICP inflation forecasts remained unchanged over 2018-2020. The ECB still projects a significant acceleration in core inflation over coming years. Nonetheless, forecasts for 2019 and 2019 were both cut by 0.1pp to 1.5% and 1.8%, respectively.

5.On Italy, during his Q&A session, Mario Draghi stressed the need to await the Italian budget law and parliament debate, but highlighted that the ECB has not seen any contagion. He further added that full adherence to stability and growth pact is critical. Mario Draghi said that all ECB officials shared the assessment of risk balance. He mentioned that spillovers from Turkey and Argentina haven´t been substantial.

6.On the QE programme, Mario Draghi said that the Governing Council has not discussed the reinvestment strategy, and noted that there are two more ECB meetings before the end of the year. He stressed once again that capital keys will remain the guiding principle.

For further information, or to receive the PDF file, please contact +351 912 897 835 or research@fincor.pt

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