The European Central Bank has left interest rates and its quantitative easing programme unchanged at its governing council meeting on Thursday. The decision came against a backdrop of inflation reaching the bank’s goal of just under 2 per cent for the first time since early 2013.
Mario Draghi, ECB president, who was under pressure from the council’s hawks, stepped back from the prospect of more rate cuts.
- ECB main rate remains at 0.00%, deposit facility at -0.40%
- QE bond buying programme continues till at least end of 2017
- Monthly QE due to drop from €80bn to €60bn from April as previously announced
- ECB keeps long-term inflation forecasts unchanged
- Draghi says “no signs yet of a convincing upward trend in underlying inflation”
- Draghi takes more hawkish tone on monetary policy
Good afternoon and welcome to our live coverage of the outcome of ECB March council meeting. There are no expectations of changes to rates and the quantitative easing programme is also expected to continue for the rest of this year. Instead, the main focus should be on Mario Draghi’s remarks as the president of the ECB comes under pressure from hawks on the council to change his tone and drop the doom and gloom. His opening remarks will also include new forecasts by regional central bankers for growth and inflation in the single currency area.
Today’s meeting comes after the official inflation measure in the eurozone has risen above the ECB’s 2 per cent target for the first time since 2013, and while little new action is expected, investors will be watching president Mario Draghi’s language and his response to ongoing criticism from German politicians.
Draghi will likely explain why he will resist calls to turn hawkish, as he believes that the uptick in inflation is transitory and not a reflection of an increase in underlying price pressures in the eurozone. While the headline measure of inflation has risen so-called core inflation, which excludes energy and food remains at 0.9 per cent — much of the recent uptick in inflation is due to the effects of a fall in the global oil price dropping out of the figures.
A novel headache for Mario Draghi
Strong growth and rising inflation should not ordinarily pose a headache for a central bank that has been lagging on both measures over the last three years.
But a faster than expected rise in inflationary pressures over the last month will mean Mario Draghi will have to defend his insistence that price pressures are under control. As well as the journalists, he’ll be facing down hawks in the governing council – led by Germany and including the likes of the Netherlands, Finland and Slovakia – over above target inflation (it hit 2 per cent in February).
Meanwhile the eurozone’s growth prospects are also picking up. Quarterly GDP expanded by 0.4 per cent at the end of last year with survey data in 2017 suggesting a decent pace of expansion at the start of a major year of election.
Crucially for inflation watchers, the ECB will also be releasing its update growth and inflation over the next two years. As of three months ago, the ECB staff projections show inflation would still undershoot a near 2 per cent target in 2019.
Happy second birthday to eurozone QE
Today’s meeting comes on the second birthday of the ECB’s quantitative easing program. They started buying sovereign bonds in March of 2015 and have since extended the program to include corporate bonds.
The program has been controversial since its implementation, not only because of worries that it is distorting capital markets but also because it may eventually run out of assets to buy because of its design.
To maximise its flexibility, the central bank was forced to abandon a rule that barred the purchase of government bonds yielding less than the deposit rate of minus 0.4 per cent at the start of this year, but it is still bound by limits on the proportion of each country’s debt it can buy. The amounts are dictated by a “capital key” where purchases are in line with the size of a member state’s economy.
Data published on Monday revealed that the central bank is “over-buying” German bonds, which helped push up the price of some bonds to all-time records.
Expect Mario Draghi, ECB president, to come under questioning about the composition of its QE measures, with economists noting that the bloc’s weakest economies are in fact need of the most, not the least support.
Germany’s Ifo to the ECB: “stem the flow of money
Influential German economic think-tank the Ifo has laid out its case for the ECB to turn off the taps sooner rather than later to get ahead of the curve on climbing inflation.
Clemens Fuest, head of the Ifo, thinks policymakers should vote to scale back their purchases from €60bn in April, reducing purchases by €10bn every month until the end of the year to contain consumer prices.
Reflecting the views of most of Germany’s hawkish economic establishment, Mr Fuest explains:
It should now take its foot off the gas and scale back its bond purchases by 10 billion euros per month as of April
The ECB should stem this flood of money or run the risk of overshooting its target.
Company surveys by Ifo show that a growing number of firms plan to raise their prices in the months ahead. The results point to a core inflation rate (excluding energy) of around 1.5 percent this year in Germany.
And the effect of energy prices will boost this figure. Inflation is increasing in Germany and in Europe, while companies’ price expectations in the eurozone as a whole are also on the rise.
What the ECB Twitterati is expecting today
The ECB is not expected to make any change to its low rates or QE policy today. Still, our favourite ECB watchers are laying out their stall on everything from Mr Draghi’s sartorial choices to the updated inflation forecasts.
A language shift
There may be no major policy changes expected today, but many ECB watchers think the central bank could shift its language around keeping its low rates policy accommodative in the face of weak inflation.
Here’s what the ECB said at its last meeting in January :
We continue to expect [rates] to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.
Any shift in the bank’s forward guidance to a more hawkish stance could see it drop the “remain at present or lower levels” wording should its forecasts show an sustained rise in inflation.
The ECB could also stress that the risks around weak growth have become “more balanced”, dropping its bias in favour of more easing.
We’ll be getting the statement in T-minus 8 minutes (12.45 GMT).
ECB makes no change to interest rates in March
As expected, no change to the ECB’s three main policy rates or QE programme this month.
The fun stuff will be coming up at Mr Draghi’s press conference at 1330 GMT where the bank will also be releasing its latest growth and inflation forecasts
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.
Regarding non-standard monetary policy measures, the Governing Council confirms that it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of this month and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP.
If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.
Absolutely nothing. A copy and paste job from the ECB which has put out an identical statement to its January policy statement.
It has repeated the QE scaleback to €60bn in April and that it “stands ready to increase the programme in terms of size and/or duration” in the face of a weaker than expected path of inflation, should it arise.
Back to tie watching everyone.
Euro comes off a little
From our currency correspondent Roger Blitz:
Traders are concentrating on the dovish feel to the ECB statement, with the euro slipping back to the $1.0550 mark after its release, although Mr Draghi’s press conference is likely to be the main factor of the session. The shared currency remains up on the day overall, by 0.1 per cent at $1.0549.
Another false start for the hawks?
Today’s unchanged statement suggests the ECB is sticking firmly to its dovish stance and is ready to loosen rather than tighten policy should economic conditions in the eurozone deteriorate.
Investors will be keeping a close eye on Mario Draghi’s words at this afternoon’s press conference, grilling him over how just how unanimous the ECB’s stance on rates and QE is given high profile criticism from some of his German counterparts.
Jennifer McKeown at Capital Economics thinks the ECB chief will “highlight the weakness of core inflation”:
He has previously explained that core inflation would need to be on a clear, sustainable upward path throughout the region (not just in Germany) before the Bank would consider starting to normalise policy.
This is still not the case and we doubt that it will be for some time. The Bank’s 2019 forecasts published for the first time later today might suggest as much. Mr Draghi will probably also reiterate concerns that political risks could dampen growth later this year.
Accordingly, we expect asset purchases to be tapered only gradually in 2018 and doubt that interest rates will be raised before the end of that year.
For the tie watchers out there – this was Draghi’s choice of neck garb in January
What will the Germans make of this
Ahead of today’s meeting, German central bank chief Jens Weidmann predicted the ECB’s inflation rate could be as much as half a percentage point higher than its current forecast over the next year.
He’s likely to be not much pleased with today’s unchanged statement on the balance of risks facing the eurozone.
Here’s the FT’s take on today’s decision from Claire Jones:
The European Central Bank has kept interest rates on hold at record lows, despite internal pressure from hawks for Mario Draghi to start reining in the currency bloc’s monetary stimulus.
The council, meeting in Frankfurt on Thursday left the benchmark main refinancing rate at zero. The deposit rate levy charged on a portion of reserves parked at central banks in the region remained at minus 0.4 per cent.
Despite the concern of governing council members who have highlighted rising inflation the ECB statement also reaffirmed the bank’s landmark quantitative easing programme, which is due to purchase €780bn worth of bonds this year.
Today’s press conference will be live from Frankfurt at 1330 GMT. You can watch live here.
ECB to release new forecasts
The central bank’s staff will be releasing their latest quarterly forecasts today. As it stands, the central bank thinks inflation will continue to undershoot its target in two years time.
Here’s where we stand:
Draghi begins press conference
He is wearing a blue tie. Navy-ish with white dots.
Draghi dovish on inflation
Mario Draghi has repeated that “a very substantial degree” of accommodation is needed to support inflation in the eurozone.
A dovish central bank chief said policymakers would continue to “look through changes” in headline inflation, repeating his stance from the last few months despite a recent surge in prices.
“Underlying inflation pressures remain subdued” says Mr Draghi as volatile energy prices have pushed up headline prices to 2 per cent as of February.
On growth, he warns that a sluggish pace of reforms in eurozone government will keep a lid on growth.
ECB keeps long-term inflation forecast unchanged
2017: 1.7 (1.3)
2018: 1.6 (1.6)
2019: 1.7 (1.7)
2017: 1.8 (1.7)
2018: 1.7 (1.6)
2019: 1.6 (1.6)
The ECB has yanked up its growth forecasts slightly but kept its long term inflation forecast unchanged – expecting prices will still be below its target in 2019.
Although prices will rise to 1.7 per cent this year, they will stay there in 2019.
Mr Draghi has insisted there are “no signs yet of a convincing upward trend in inflation” and will remain “close to 2 per cent” in the current months due to energy climbs.
Core inflation is only expected to rise at a moderate pace, added the central bank chief.
Draghi upbeat on economic conditions
Mario Draghi gives a pretty upbeat assessment of economic conditions in the eurozone, which he says is being supported by monetary policy. He says the increase in inflation is transitory and “underlying inflation pressures continue to remain subdued”
There are signs of somewhat accelerating global recovery and increasing global trade, however economic growth is expected to dampened by a sluggish implementation of structural reforms
Draghi rhetoric still warns on economic risks
Despite the recent sunnier outlook for eurozone growth and inflation, Mr Draghi is not getting carried away.
His comments on growth and inflation are very similar to what we’ve heard over the last six months or so, suggesting that the doves within the central bank have won the case.
Time for the Q&A
More structural reform and growth-friendly fiscal policy is necessary
Other policy areas must contribute much more decisively to the economic recovery, Draghi says. The pace of structural reform must be stepped up. “Greater reform implementation is necessary.”
Regarding fiscal policy he says that all countries should look to delivering a more growth-friendly mix of tax and spending.
What has changed in the eurozone economy?
Mr Draghi is asked about what has shifted in the ECB’s outlook as its sticks to its mantra of monetary easing and still unsustained inflation today.
The Italian central bank chief notes that unemployment is down to a pre-eurozone crisis and that overall the ECB’s measures have added 1.7 percentage points to inflation and growth.
Celebrating achievements from the stimulus measures, Mr Draghi says “the risks of deflation have largely disappeared” but he is not yet ready to “pronounce victory on the inflation front”.
The sentence that has been removed
The ECB has “lost its sense of urgency” to take further action on monetary stimulus, says Mr Draghi as he comments on what has changed for the central bank between now and January.
He adds that one major sentence has been removed from his opening remarks, namely that:
If warranted, to achieve its objective, the governing council will use all the instruments available in its mandate.
The ECB is also not planning to unleash another round of cheap banks loans (known as the TLTRO). Following a discussion between its rate-setters, policymakers also “do not anticipate that it will be necessary to lower rates further”, adds Mr Draghi.
A hawkish shift?
Those comments on no reduction on lower rates and TLTRO are the most hawkish elements in today’s policy decision.
Draghi is asked about why they did not discuss the TLTRO program and about indications from the CDS markets that some investors are concerned about the breakup of the euro.
I remarked it was only not discussed at all as a sign of the improved climate. That’s why we didn’t discuss it. It’s there and it’s potentially an instrument that could be used if the economic situation warranted it. There’s no obstacle to its use.
On the second point, frankly I don’t see that. There are tensions, nothing that is that serious. The euro is irrevocable.
Draghi says that countries see the euro as a prerequisite to the single market and they have benefited from that. He points out that three countries joined the eurozone during the euro crisis.
Bond yields leap on Draghi’s hawkish turn on rates
On raising rates before the end of QE
The FT’s Claire Jones asks Mr Draghi if he can see “any circumstances” in which rates can be raised before the end of QE
He responds that based on current information rates will stay low and “expect them to remain at present or lower levels for an extended period of time”.
The probability that rates will get lower “will go down” he adds.
Euro hits a fresh high
The euro has hit a fresh day high of $1.0585 while Mr Draghi has been speaking, reports the FT’s Michael Hunter, taking it up 0.4 per cent overall on the session. His remarks that there was no longer a sense of urgency on stimulus look to be supporting the shared currency, taking it back up to levels last seen two days ago.
German trade surpluses
Question about the level of agreement within the governing council: Is there more consensus? And a second question on trade surpluses, the US administration expressed concern about German trade surpluses, do they reflect some kind of imbalance?
The currency of Germany is the euro. German monetary policy is conducted by the ECB. The ECB is independent. The exchange rate is determined by market forces.
The ECB has not intervened in foreign currency since 2011 and when we did it we did it as part of a coordinated intervention to stabilise the Japanese yen after the earthquake and tsunami.
How the consensus changes, I don’t have meter to measure that. The discussion today was pretty consensual, by and large I think I gave you a fair account of what was discussed. I can’t remember what the consensus was two or three years ago, that’s too hard for me.
Draghi cools on ‘multi-speed’ Europe
The ECB chief is asked what he makes of the European Commission’s plans for a more “multi speed Europe”. He’ll be attending tonight’s EU Council in Brussels later today but is reticent to comment on “wholly political” developments on the state of EU integration.
Still, he adds that there is a clear “need” for countries to work together to tackle “supranational” problems.
German bond market suffering from flight to quality
Is the ECB causing distortions in the German bond market? Mr Draghi says investors are snapping up German debt as part of a “safe haven” trade with bondholders rushing to the “quality” of German bonds.
He dampens accusations that the ECB’s QE measures are solely responsible for these developments, however, adding that record prices on short-term German bonds is also due to market appetite for yield in a world of negative interest rates.
Hard to predict economic impact of politics, Draghi says
Draghi is asked about political risks and claims of currency manipulation:
These risks, some of them have materialised but we haven’t seen yet a significant economic impact. We know that certain of these events are unambiguously negative. But I will not say which ones.
Almost a year has passed since the British referendum, we haven’t seen a yet a consequence. We know that these are risky events, we know that they are risky events, we don’t know how they will reverberate on the economic situations.
On currency manipulation he says that commitments not to engage in competitive devaluation have been the “pillar of the stability that has accompanied world growth over the last 20 years or longer.” He says it is important these commitments are reaffirmed.
Draghi fights back against euro-doubters
Forget the haters. Mario Draghi has swatted away the claims of euroceptics in a major electoral year where the likes of the Netherlands, France and Germany is experiencing rising support for eurosceptic parties.
The euro is here to stay. It is irrevocable.
The euro is a channel for solidarity across some of its members.
The Brexit that dare not speak its name
Mr Draghi makes an oblique reference to the UK’s EU referendum as one of the major developments which will have an impact on the medium term growth of the bloc.
He mistakenly adds that it has been “a year and a half” since Brexit vote which was actually nine months ago. Feels like longer, clearly.
Verbal acrobatics from Draghi
Patrick O’Donnell at Aberdeen Asset Management on what investors should make of today’s meeting:
Draghi has ever so slightly opened the door to changing their policy stance. He’s done this by saying that the Governing Council talked about changing the language about where rates are in their monthly statement, but didn’t actually change it.
This is effectively him signalling that something might change in the future, just not today.
It’s a classic Draghi technique of saying something that will move markets without actually doing anything. Due to this, and a wordy response to a question about raising rates before QE ends, markets will now start to recalibrate on the assumption that the ECB will remove accommodation towards the end of the year.
Wages are key to inflation in the long term, Draghi says
Draghi is asked whether it is part of the ECB’s mandate to keep the currency union alive and is asked why better prospects have not translated into higher inflation for 2019.
We haven’t seen yet how these better prospects have translated. We haven’t seen any significant development on the wages front, that is the key point. That is one important element.
The mandate of the ECB stays what it is, price stability. Nothing more.
No worries about asset shortages
Amid fresh evidence that the ECB has been cutting back on its purchases of bonds from Portugal, Ireland and Finland, Mr Draghi denies any asset shortage problem.
“[The programme] is on track both time wise and quantity wise. There is no reason to be worried about this at this point in time.”
Markets react: German yields and euro bounces on hawkish hints
Germany’s benchmark 10 year bond yields have leapt to their highest level since early February after today’s remarks from Mr Draghi that rates would be unlikely to be cut from their record lows. The Bund hit 0.42 per cent this afternoon up around 6 basis points while the euro has also gained to its highest level of the week.
A hawkish dove
No more rate cuts and no more cheap bank loans makes for one hawkish Draghi:
Eurozone core inflation to climb in 2019
Headline inflation forecasts may have remained unchanged today but core inflation – arguably a more important measure of inflation which strips out volatile elements – will rise to hit 1.8 per cent in 2019 according to today’s ECB forecasts.
That is up from a forecast of 1.7 per cent made in December and in line with the ECB’s mandate. The forecast could well embolden more hawkish policymakers into pushing the ECB to announcing an end to its stimulus measures.
Chart: record eurozone policy uncertainty has fallen back significantly
Reaction: eurozone deposit rate could be hiked in Sept – BNP Paribas
Luigi Speranza, economist at French bank BNP Paribas, thinks today’s meeting has laid the groundwork for the ECB to begin thinking about turning off its ultra-accommodative monetary policy. The bank is sticking by its forecast for a rise to the -0.4 per cent deposit rate in September:
Mr Draghi acknowledged there was a discussion on removing the reference to ‘lower rates’ from the statement and, when asked, refused to rule out the possibility of hiking rates before QE ends.
We found these comments supportive of our view that the ECB will raise the depo rate later this year (our base case is September), in conjunction with the announcement of asset-purchase tapering to start in 2018.
Mr Draghi highlighted that risks have shifted, as we had expected. More crucially, this shift is having an impact on the internal debate on monetary policy. >While the ECB opted to be cautious at this stage, Mario Draghi appeared to support expectations that, in the absence of adverse shocks, the forward guidance on interest rates and QE, and possibly the level of interest rates, are up for discussions over the next few months.
Summary: flip flopping Draghi
That ostensibly boring conference turned out to have a few major surprises from the ECB.
We’re wrapping up our coverage for the day but here’s a summary of the main developments:
- Rates unlikely to go any lower: Policymakers are no longer likely to cut rates below their record low levels said Mr Draghi – the most hawkish element of today’s policy decision. The Italian said he did “not anticipate that it will be necessary to lower rates further”.
- No more cheap bank loans: The ECB’s TLTRO programme – which is running in its third iteration – is unlikely to be launched again as credit conditions in the eurozone have improved significantly.
- Still no sustained rise in inflation: despite the upbeat tone, Mr Draghi qualified his remarks by repeating there was no major change in the ECB’s inflation outlook. Price rises are still not sustained and will fall below target at 1.7 per cent in 2017
- Markets Eurozone sovereign debt yields jump to a monthly high while euro gains to strongest in a week.
- Brexit is still bad: the negative effects of the UK’s EU referendum may not have manifested in the eurozone economy so far but that will change as medium term growth is reduced from the UK’s withdrawal from the single market.
Thanks for joining us.