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EMU CommentThe ECB expects to hike rates in September 2019 at the earliest

  1. ECB ends QE as expected and gives more explicit guidance on rates
  2. Inflation forecast revised up, but growth forecast revised down
  3. Rate hike in September at the earliest?
ECB ends QE as expected and gives more explicit guidance on rates
At its policy meeting, the ECB announced an end to QE at the end of the year following a tapering of purchases to EUR 15bn from October. This was in line with expectations in the market. Simultaneously, the ECB sharpened the forward guidance on interest rates, saying that it expects the key policy rates to remain at their present levels at least through the summer of 2019, and in any case for as long it takes for inflation to evolve with the expectations of a sustained adjustment path. Taking this literally, this cuts off the expectations of earlier rate hikes (as we have); as a consequence, the EUR weakened and market interest rates decreased.
Inflation forecast revised up, but growth forecast revised down
In the introductory statement, Draghi presented the updated economic staff forecasts (see table). On the one hand, GDP growth for this year was lowered to 2.1 percent from 2.4 percent due to weaknesses in the beginning of the year, but the forecasts for 2019 and 2020 were kept unchanged. In addition to the ECB still seeing some temporary factors lowering growth, it now also mentioned supply-side factors (capacity constraints). Risks to the outlook were still assessed as broadly balanced, but besides protectionism, recent market volatility was mentioned on the downside. On the other hand, the ECB revised the inflation forecast up solidly to 1.7 percent this year and for 2019, in line with our expectation. Moreover, Draghi was even more confident in inflation converging toward the ECB goal. He added that domestic cost pressures are strengthening amid high levels of capacity utilisation. Hence, the ECB forecast of the inflation path is now very much in line with ours.
Rate hike in September at the earliest?
We continue to believe that the ECB in time could have the arguments in place to go for an earlier rate hike, but uncertainty has definitely increased following today’s monetary policy announcement. Whether the ECB can change the guidance along the way without hurting its credibility is an open question. Recall that the ECB several times acted against or changed its guidance when it eased monetary policy in the wake of the crisis (recall the zero bound rate limit or never QE). Whether guidance can change symmetrically in this way is hard to say. However, for now, we read the lips of the ECB and see it as likely that the first rate hike will be in September 2019, but if anything we still tend to see arguments for the ECB raising the rate earlier. Among those arguments is that, in our eyes, the window for normalisation appears to be closing fast compared with earlier rate-hike cycles, as global growth already appears to have peaked, and we see risks of a marked US slowdown in 2019. Furthermore, the ECB likely wanted to prevent an adverse market reaction from moving forward in its normalisation strategy today, and therefore set the earliest start date for hikes appropriately late (and open ended).


Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist


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