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EMU commentProspects for a rate rise waning

  1. ECB sees risks on the downside
  2. March meeting a live bet for change in guidance
ECB sees risks on the downside
As expected, the monetary policy statement repeated the December message of unchanged key ECB rates at least through the summer and reinvestments of maturing securities purchased under the asset purchase programme for an extended period past the first rate hike and in any case for as long as necessary. So the focus was on the subsequent press conference with ECB President Mario Draghi, and here he acknowledged that incoming data had remained weaker than expected and saw weak near-term growth momentum. Consequently, the risks to the economic outlook were now seen as being on the downside due to geopolitical factors, threat of protectionism, emerging market vulnerabilities and financial market volatility. On inflation, the ECB expects inflation to slow in coming months due to lower oil prices, but kept that core inflation will rise gradually toward target. Furthermore, the ECB did not discuss implications of the downside risks for guidance and TLTROS, but Draghi stated that the ECB needs to see a monetary case for new TLTROS, so we are probably not quite there yet.
March meeting a live bet for change in guidance
Even though a lot of ECB speeches recently have been quite united in warning against overreacting to the continued batch of weak data, the ECB acknowledged that risks to its outlook are now on the downside. The need for this was further highlighted by today's weaker-than-expected eurozone PMIs (see graph - though the numerical explanation value of the graph has diminished during the QE era). Therefore we see that the ECB is poised to make another downward revision of the economic outlook in the updated staff forecast at the March policy meeting. Hence the March meeting is a live bet for a (dovish) change in the ECB forward guidance on rates, and in our view this should suggest that the window of opportunity for rate hikes in the next two years is closing fast as we expect the overall economic slowdown to continue for the next two years. Asked about the market pricing of the first rate hike (in spring 2020), Draghi answered that the ECB is only assessing not validating these expectations, but also said that markets have understood the ECB’s reaction function.

Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist


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