Closed ECB holds rates in January – as it happened



The European Central Bank has left interest rates and its quantitative easing programme unchanged.

Key points

  • ECB holds main rate at 0.00%, deposit facility at -0.40%
  • QE bond buying programme to continue until at least end of 2017
  • Level of QE to drop from €80bn to €60bn per month from April as previously announced
  • Press conference starts at 13:30 GMT

By Gemma Tetlow and Elaine Moore

ECB head Mario Draghi has sought to take the central bank out of the political fray in 2017 – a crucial year for the national elections in the eurozone – by announcing significant changes to its QE programme at its last meeting in December.

But he faces pressure from two sides: rising German inflation has led some influential voices in the country to demand further cuts to QE, while economists argue that bowing to such pressure would destroy the credibility of its central mission to keep inflation close to 2 per cent.

Claire Jones looks at the issues here.

Inflation has picked up since the last ECB meeting

The ECB will have been paying close attention to recent developments in inflation across the Eurozone. Inflation across the Eurozone rose to 1.1 per cent in December, from 0.6 per cent in November, which was in line with expectations.

Inflation picked up sharply in Germany in December – rising from 0.8 per cent in November to 1.7 per cent in December.

But prices are rising less quickly in France, where annual inflation hit just 0.6 per cent in December, marginally higher than the 0.5 per cent price increase over the year to November.

Despite rising headline inflation, ECB Executive Board member Benoit Coeure said in an interview at the end of December that the ECB is “still waiting for signs that core inflation is on the rise & will clearly exceed 1%.”

Claire Jones predicts here that soaring inflation presents the ECB with a dilemma.

Consensus on trading desks is that ECB president Mario Draghi will avoid saying too much of anything today. Markets seem far more interested in US Federal Reserve Janet Yellen this morning. See the FT market round up here.

Despite rising inflation, analysts expect the ECB to remain happy with their doveish policy stance.

Analysts at UBS

We do not think [the recent increase in inflation] has immediate implications for ECB monetary policy, given that the Bank laid out the road map for monetary policy in 2017 only a few weeks ago. Having said that, the latest data will make the discussion on the ECB Governing Council more lively and strengthen the arguments of the hawks (with the particular strength of the German inflation data playing into the hands of Bundesbank President Weidmann).

David Kohl of Julius Baer

Mario Draghi seems to be comfortable to allow inflation to drift higher before declaring full victory over deflation. The visible inflation increase is largely the result of a strong base effect in the prices for energy and will be therefore transitory. We expect the ECB to remain reluctant to acknowledge the more balanced inflation outlook today. This will put downwards pressure on the euro and shield European bond yields from US-induced upwards pressure.

Analysts at HSBC

The ECB might soon face increasing pressure from some members of the council to start tapering QE, but with inflationary pressures remaining muted and all the numerous political events, we think it will keep its policy on hold…and see where inflation settles in the second half [of 2017] before deciding on a possible further extension of QE.

Frederik Ducrozet of Pictet says that – with policy likely to remain unchanged – ECB forward guidance will be the thing to look out for. Do they maintain their line from December that interest rates will remain “at present or lower levels for an extended period of time”?

Economists began dusting off predictions that the euro might fall to parity with the dollar last year. The currency has been rising in January – putting parity chatter on ice – but watch out for any surprise falls today.

Eurozone growth is picking up

Since the ECB last met in December, new data have pointed to strong growth in the Eurozone economies at the end of 2016. New figures show industrial production across the bloc grew by 1.5 per cent in November.

The first estimate of German GDP growth for the whole of 2016 indicates growth there accelerated to 1.9 per cent – the fastest pace for 5 years.

Claus Vistesen, Pantheon Macroeconomics

An EZ Q4 GDP print of 0.5% to 0.6% quarter-on-quarter is definitely do-able, much better than the 0.3% gain in Q3.

Claire Jones has taken a look at the Eurozone’s newfound resilience here.

Just because the ECB isn’t expected to change rates don’t expect the press conference to be boring, says BNP chief economist William De Vijlder:

For those who can’t access Twitter, it reads:

Following Dec decision no need for today’s #ecb press conference to be boring: rise headline inflation, hard #brexit, Trump comments on USD

Credit conditions continuing to improve in the Eurozone

The latest ECB bank lending survey, published on Tuesday, painted a positive picture of bank lending in the Eurozone – with continued growth in the demand for loans and a continued easing in credit conditions across all loan categories.

Huw Pill, Goldman Sachs

These results are consistent with the gradual healing of the Euro area banking sector since the crisis of 2011-12, the ongoing modest recovery of Euro area economic activity and the continued substantial support provided via the ECB’s ultra-accommodative monetary policy stance.

A quick reminder of what the ECB announced in December:

1. Asset purchase programme to be continued beyond March 2017, lasting until at least December 2017.

2. Monthly asset purchases to be reduced from €80bn to €60bn from April onwards.

3. Reduced minimum maturity for bonds eligible for asset purchase programme from 2 years to 1 year.

4. ECB will be allowed to buy bonds yielding below their deposit rate (-0.4%) “to the extent necessary”

5. Kept interest rates and other parameters of the asset purchase programme unchanged.

Is the ECB’s ability to intervene further constrained?

The ECB is not expected to announce any policy changes today. But concerns have been raised about their scope for further action, if more were to be required.

In December they announced that monthly asset purchases will slow down from April onwards. But the minutes of their meeting showed this was done not only for economic reasons but also because they are concerned about running out of bonds to buy.

Claire Jones discussed this in more detail here.

Yields in eurozone bond markets have been steadily moving away from last year’s historic lows. Here’s Germany’s 10-year Bund over the last 12 months – spot the brief period during which it was trading at negative rates:

Emoticon BIS accused of pushing staff to back view on rates

The Bank for International Settlements, which provides advice to the world’s central banks, has been accused of putting pressure on research staff to back its controversial warnings about the dangers of historically low interest rates.

Ralph Atkins has more here.

Trump and the Eurozone

Another point of discussion at the ECB meeting may have been Donald Trump and what his presidency could mean for Europe. Worryingly, this week he suggested he could be the first American president since the second world war to champion European disintegration.

He has also kept up his protectionist rhetoric. So far it has been aimed at emerging markets. But if he were to apply the same threats to Europe, it could put at risk the large trade flows between the Eurozone and the US, which account for 13 per cent of total exports from the Eurozone.

The Eurozone could stand to benefit if Mr Trump follows through with his promised fiscal stimulus. But Alan Beattie warns this fiscal boost could be elusive.

The dollar also fell earlier this week after Donald Trump said the currency was “too strong” for US companies to compete with overseas competitors.

Italian banks

Mounting pressure on Italy’s financial sector is also likely to be a topic of interest today. La Repubblica economics commentator (and former FT-er) Ferdinando Giugliano explains the culture clash between Brussels and Rome

EmoticonRates on hold, no change to asset purchases

The ECB has just announced they are keeping interest rates on hold and have not made any further changes to their asset purchase programme.

No surprises there – but still plenty of scope for some moves in credit markets.
Breakeven rates, which measure investor expectations for inflation, are close to 18 month highs. If Draghi is drawn into discussing the pace of rising prices during the press conference then yields in eurozone bond markets may start to climb.

The wording of the ECB statement is almost identical to December. No hint of a change in their forward guidance yet. Read the statement here.

What to expect from the press conference at 1330GMT

As we now wait for Mario Draghi’s press conference, you might like to take a look at Claire Jones’ preview of the questions he might face – just because policy is unchanged, does not mean there is nothing to discuss.

Financial markets were expecting this decision. Euro is holding steady at $1.0662. Yield on benchmark 10-year German Bunds are flat on the day at 0.38%

Jennifer McKeown at Capital Economics thinks that Trump’s recent apparent attempts to talk down the dollar will encourage Mario Draghi to steer well clear of anything that might be construed as a similar type of comment about the Euro.

Instead, he could reiterate his commitment to the G7’s stance on market-driven currencies and perhaps point to Janet Yellen’s latest comments as an affirmation of the independence of the world’s major central banks.

Now the ECB has confirmed expectations by keeping interest rates and asset purchases unchanged all eyes are on the press conference. Draghi will be pressed to explain why accelerating inflation does not justify a further taper to the ECB’s mammoth QE programme.

Europe’s corporate bond puzzle
The ECB bought just €4bn of corporate bonds in December – its lowest monthly purchase on record. Thomas Hale asks whether the central bank’s plan to start tapering bond purchases is having an impact on Europe’s corporate bond markets already.

Here’s the euro post ECB rate decision:

The FT’s resident Mario Draghi tie-watcher Katie Martin is in Davos this week. In her absence I’ll go with purple for hold #DraghiTieGuesses

Divergent inflation trends will be a challenge for the ECB this year. Inflation and growth have picked up in Germany but unemployment remains high and inflation subdued elsewhere. The ECB has to make policy for the bloc as a whole but expect them to get quizzed on their dovish stance by hawks in Germany.

(Chart courtesy of HSBC)

The press conference has started and that tie looks purple to me

Draghi starts by talking about debt purchases made under QE below the deposit rate – there will be a separate press release later this afternoon

Draghi says “a very substantial degree of monetary accommodation is required” to meet their inflation target.

ECB view of economic developments

Euro area real GDP increased by 0.3% in Q3 2016. Draghi says data point to “somewhat stronger growth” in the last quarter of 2016 and that they “expect the economic expansion to firm further” this year.

Headline inflation is likely to “pick up further in the near term”

Draghi stresses that the pick up in headline inflation is mainly about energy prices, whereas underlying inflation is expected to pick up more slowly.

ECB monetary policy is supporting borrowing conditions for firms and households, Draghi says. Loan demand has been increasing at a “robust pace”.

Draghi says that ECB takeaway from economic and financial analysis is that there is a “need for a continued very substantial degree of monetary accommodation to ensure a sustained return” of inflation rates to target.

Now for the Q&A…

Euro turns lower

Update from Michael Hunter on the FT’s markets desk:

The euro has turned lower for the day against the dollar at $1.0601 after Draghi says there is no sign of convincing upward trend in underlying inflation

Asked whether the ECB would reduce stimulus if things turn out better than expected, Mr Draghi says this is still a “high class problem”, which the council has “not discussed”.

Draghi says that it is too early to comment on Donald Trump’s statements on dollar strength this week. However, he pointed out that there is a “very strong international consensus to refrain from competitive devaluations”.

The FT’s Claire Jones asks what policy challenges are presented by sharp divergences in headline inflation between core and peripheral Europe – and whether the ECB is still facing trouble finding enough bonds to buy QE

Draghi says that it is too early to comment on the prospects of a hard Brexit – the outcome will depend on negotiations.

Draghi answers that he is confident about the smooth implementation of QE, but that the ECB is ready to revise its strategy as needed. Policy decisions have been a success, he adds. Consumer confidence is up, unemployment has fallen. Disparity of growth across the region is at the lowest level since 1997.

Draghi in observation mode, says Shilen Shah, bond strategist at Investec Wealth & Investment:

The ECB’s first press conference for 2017 was in many ways a continuation of 2016, with the central bank looking for indications that core CPI is heading upwards. The base effect from a higher oil price is likely to mean headline CPI is likely to drift higher over the course of the year, however Draghi’s comments suggest that the ECB is in no rush to adjust monetary policy in the near term, with the central bank currently in observation mode.

The ECB will reduce its asset purchases from 80bn euros a month in March to 60bn euros in April. But Draghi says the council has “not discussed” whether this will entail a pro rata reduction in each individual bond buying programme or shutting down some individual programmes first.

Asked about how he responds to German criticisms of ECB policy, as German inflation rises, Mr Draghi says:

Low rates are necessary now to get higher rates in the future…The recovery of all of the Eurozone is the interests of everyone, including Germany.

He added that German savers “have to be patient”.

A question on last month’s decision. If December’s announcement was not a taper then how will a taper be communicated when the time comes? Draghi avoids being drawn into the taper/extension debate and answers quickly that it will be clear.

Draghi said in his opening remarks that the Governing Council is unanimous in concluding that their monetary support has worked. So does that mean the council members who voted against the extension in December have admitted they were wrong?

Draghi replied:

We don’t have…public admissions of guilt, Mao-, Chinese-style…there was a general satisfaction that the policy is working

Asked if recent policies towards failing Italian banks suggest that bail in “is dead”, Mr Draghi says “I frankly don’t want to comment on that”. ECB deputy governor insists: “No, I don’t think so. Present legislation…is being applied in all its details… In accordance with the rules that have been defined.”

Here’s a reminder of the pressure growing on Italy from the EU over its fiscal position, which is expected to worsen this year as the government helps to recapitalise struggling banks, beginning with Monte dei Paschi di Siena

Draghi conceded that headline inflation has been higher than their last macroeconomic forecast anticipated. However, he stressed again this was driven by rising energy prices, whereas ECB policy will be guided by a view on what is happening to underlying inflation.

Another question about the gap between inflation rates in core and peripheral Europe – will there be a point at which the ECB has to act? No, says Draghi, who asks a rhetorical question: how likely is it that divergences are unmanageable?

Asked if debt in Italy and other eurozone countries will be sustainable in a world without QE, Draghi says the central bank does not see any country’s debt as being unsustainable

Draghi says that loose monetary policy played a crucial role in enabling employment growth over the past 3-4 years, although was not the only factor.

While there is no policy surprise in today’s press conference, markets are telling an interesting story about the ECB’s end-game, says Lena Komileva at G+ Economics. The euro has fallen, but yields on eurozone bonds are flat.

“Markets expect “lower for longer” ECB rates, which is bearing down on the euro, but not “QE forever”, with bond yields holding up on the week (up on the day too).”

That is the end of the Q&A session.

The next ECB monetary policy meeting will be on 9 March – join us back here then.

Takeaway message for markets is nicely summed up in this tweet from the ECB:

(for those who can’t access Twitter, it reads: Low interest rates are necessary now to get higher rates in the future.)

It was a short press conference today – 15 minutes less Draghi action than last month.

A lot of the time today was spent discussing the recent rise in inflation, especially in Germany. The two main takeaways on that are:

1. The Governing Council are still sanguine about price rises, as the headline increase is mainly down to the (one-off) effect of energy price changes.

2. German savers need to be “patient” and accept that continued loose monetary policy, supporting broad-based growth across the bloc, is good for them too.

No new details on how the ECB will implement its forthcoming “tapering” (not Mr Draghi’s word!) of asset purchases. Apparently the Governing Council have not yet discussed which assets they will purchase less of when their monthly purchase drop from 80bn to 60bn in April.

Quick market wrap: the euro is down 0.4% at $1.0598 following Draghi’s emphasis on the need for low rates – but stocks and bonds have barely moved. EuroStoxx 600 down 0.1% on the day, 10-year German Bund yield up 1 basis point at 0.39%

Having to balance competing views within the Governing Council, Mr Draghi avoided giving away too many new details today but Luke Bartholomew at Aberdeen Asset Management thinks he might struggle to keep this up:

The ECB has not always been especially pro-active about getting ahead of problems. Even now Mr Draghi wants to avoid the mere mention of the taper word at all costs…[but] investors are soon going to start asking more questions about how the QE programme will taper into 2018.

During the press conference, Mario Draghi said that the ECB would be looking for inflation to be:

1. Strong enough to anchor medium-term inflation expectations.

2. Durable and self-sustained, which effectively means that inflation must be stable close to the target even without QE and extremely low rates.

3. Broad-based across the Eurozone.

Claus Vistesen at Pantheon Macroeconomics thinks this means:

Monetary accommodation will be a central feature of ECB policy for a long time. In other words, it means that the bar for completely removing QE, and normalising rates.

That’s all folks!

Thanks for joining us and see you again in March.