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PATRIS MACRO - Key Takeaways from the October ECB MPC meeting

25 Oct 2018

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Key Takeaways from the October ECB MPC meeting

Bottom-Line: The press release disclosed by the ECB showed no changes to policy or forward guidance, as widely expected. Interest rates are still seen as remaining at current level at least through the summer of 2019, and as long as necessary to ensure the continued convergence of inflation to target over the medium-term. Moreover, the Bank still expects to end net purchases under the APP by the end of the year.

Mario Draghi highlighted that we are seeing a weaker economic momentum, but not a downturn as survey indicators are still above long-term averages. On inflation, Mario Draghi repeated the same message. With domestic cost pressure strengthening and broadening, underlying inflation is seen increasing over the medium-term. Therefore, the ECB has no reason to doubt its confidence in inflation, according to Mario Draghi.

Overall, the ECB is sticking to its plans. However, and as Mario Draghi said in his press conference, December forecasts by the ECB staff could be important for the risk assessment. Therefore, all eyes should remain on the economic data over coming months.

Details:

Press release: The Governing Council stressed that it will continue to make net purchases under the APP at the €15bn monthly pace until the end of December 2018 and reaffirmed the intention to end net purchases at that moment, subject to incoming data confirming the medium-term outlook for inflation. The Governing Council also reiterated the intention to reinvest the principal payments from maturing securities purchased under the APP 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. Finally, interest rates are expected to remain at current level at least through the summer of 2019.

Press Conference: Mario Draghi acknowledged that incoming data has been weaker than expected, although still consistent with the baseline scenario. Mario Draghi highlighted that we are seeing a weaker momentum, and not a downturn as survey indicators are still above long-term averages. Protectionism, emerging and financial markets, BREXIT and Italy were cited as risks, while sector specific developments have impacted growth in the near-term (with Mario Draghi highlighting the hit to 3Q18 output from the German car sector). Risks to the growth outlook are still seen as being broadly balanced. Mario Draghi added that December forecasts by the ECB staff could be important for the risk assessment.

On inflation, Mario Draghi repeated the same message. Inflation should remain around current levels for next months. Underlying inflation remains muted, but is expected to pick up towards the end of the year. Moreover, with domestic cost pressure strengthening and broadening, underlying inflation is seen increasing over the medium-term. Mario Draghi stressed that the increase in negotiated wages are a “comforting sign”, while the labour market is tightening progressively.

On Italy, Mario Draghi said once again that spillovers to other countries are limited so far. The Governing Council has not talked about extending QE, although Mario Draghi mentioned that some officials raised questions around TLTROs.

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