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PATRIS - MACRO - Key takeaways from ECB

13 Dec 2018


Bottom-Line: Mario Draghi’s introductory statement showed a more cautious assessment of the growth outlook for the region. Risks were still seen as broadly balanced, but the Governing Council now sees the balance of risks moving to the downside. The central bank’s GDP forecasts for 2019 and 2020 remain above consensus expectations.

The ECB remains confident that inflation is on track to converge to its medium-term target, reflecting rising wage growth, while domestic cost pressures are strengthening and broadening. However, the ECB lowered again its underlying inflation forecasts for 2019 and 2020.

On interest rates, Mario Draghi mentioned again that markets understand the ECB’s reaction function, suggesting that the central bank remains comfortable with the current dovish market pricing for interest rate hikes in 2019 and 2020. The ECB forward guidance for interest rates continues to point towards unchanged interest rates through the summer of 2019.


A-Press Release: The Governing Council confirmed that net purchases under the APP will end in December 2018 (a widely expected decision) and reiterated that interest rates will remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued convergence of inflation to the target level. The Governing Council decided to enhance its forward guidance on reinvestment. The ECB intends to continue to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

B-Press Conference: Mario Draghi’s opening statement recognised that incoming data have been weaker than expected, reflecting country & sector specifics, as well as softer external demand. Mario Draghi added that uncertainties from protectionism remain prominent (even tough Mario Draghi recognised that the trade situation is probably better than two months ago), and cited emerging markets (although the situation in some countries is seen as being less dangerous) and volatility in financial markets as sources of risks. He said that the Governing Council sees a somewhat slower growth momentum ahead. Supporting the idea of a Governing Council more concerned about economic growth, Mario Draghi said that although risks to the economic outlook continue to be seen as being broadly balanced, the balance of risks is considered to be moving to the downside.

On inflation, the opening statement stressed that pricing pressures remain muted. Hence, significant stimulus is still seen as being necessary to sustain inflation. Inflation is expected to decrease over coming months, although underlying inflation is still expected to move higher in the medium-term, underpinned by rising wage growth. Moreover, the Governing Council considers that domestic cost pressures are strengthening and broadening.

On reinvestments, Mario Draghi clarified that PSPP redemptions will be reinvested in the same jurisdiction, and that the ECB intends to bring the PSPP portfolio closer in line with capital keys. A specific time for reinvestments was not discussed according to Mario Draghi. He added that long-terms loans were mentioned by some governors.

C-Eurosystem/ECB staff macroeconomic projections: Real GDP growth forecasts were reduced by 0.1pp in 2018 and 2019 to 1.9% and 1.7%, respectively. For 2020, the ECB still sees real GDP growing by 1.7%. Forecasts for 2019 and 2020 remain above market consensus (1.6% and 1.5%, respectively). Regarding headline inflation, there were small changes for 2018 and 2019. HICP inflation is seen at 1.8% in 2021, consistent with the medium-term target. Nevertheless, forecasts for underlying inflation were reduced again over 2019-2020. 

D-Details for the reinvestments: Technical parameters disclosed by the ECB include: (1) the size of the cumulative net purchases under each constituent programme of the APP will be kept stable at their respective end of December 2018 level. Limited temporary deviations may nevertheless occur due to operational reasons, (2) for the PSPP; the allocation across countries will continue to be guided by the ECB capital keys. Redemptions will be reinvested in the jurisdiction in which principal repayments are made, but the portfolio allocation across jurisdictions will continue to be gradually adjusted with a view to bringing the share of the PSPP portfolio into closer alignment with the respective national central banks’ subscription to the ECB capital key, (3) The reinvestment of principal redemptions will be distributed over the year to allow for a regular and balanced market presence. Purchases of securities with a yield to maturity below the interest rate on the ECB’s deposit facility will continue to be undertaken to the extent necessary.


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