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EMU CommentWeaknesses not stirring the ECB's hand

  1. Copy/paste monetary policy decision
  2. Risks still balanced
  3. We largely agree with the ECB “plan”
Copy/paste monetary policy decision text
As highly expected, the ECB's policy meeting contained little news compared with the September meeting. Hence, the overall message of the banks' normalisation intentions was unchanged, with the prospects of QE purchases ending at year-end and unchanged key ECB rates until at least through the summer of 2019. The December policy meeting will likely be a bit more interesting, as we get updated ECB forecasts on growth and inflation.
Risks still balanced
Beforehand, focus was on the potential of the ECB increasing the downside risks to the outlook for the economy, given recent financial market jitters combined with worries over Italian debt plans and the risk of a hard Brexit. But while acknowledging that incoming information "has been somewhat weaker than expected", ECB president Draghi maintained that risks to the outlook are balanced, while downside risks remain prominent. Some of the weakness was ascribed to sector-specific developments. On the inflation outlook, the ECB's message was unchanged in that underlying inflation is expected to increase gradually over the medium term. This time Draghi refrained from repeating September's message that tighter labour markets are pushing up wage growth; perhaps due to the reaction of his “vigorous pick up” (in core inflation) speech in parliament just after the September policy meeting.
We largely agree with the ECB “plan”
We did expect a largely unchanged tone from the ECB today. Remember that recent uncertainty has also brought about easier financial conditions, as the EUR has weakened and market interest rates are almost unchanged since the ECB introduced the normalisation plans (guidance) at the June policy meeting (see graph). Hence, the tapering of QE purchases in October has so far left no marks on interest rates. Also, the Italian spread widening so far has failed to spill over to other EUR peripheral spreads, indicating low investor fears of contagion. We maintain our view of QE purchases to end ultimo 2018 and see a first ECB rate hike in approximately 12 months. We still see the potential for an earlier hike, if anything, due our forecast of gradual increasing inflation and policy normalisation among other global central banks. Recent comments from members of the Governing Council have revealed an internal diverging view on the timing of the first hike, as well as highlighting that the ECB's guidance is an expectation and that those can change with economic data. The views have been for both a possible later hike as well as an earlier one. We tend to lend weight to the latter, as we agree with ECB’s Klaas Knot that if the economy develops as expected, the ECB could move earlier on rates.

Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist


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