Closed ECB leaves rates unchanged, more news on QE to come in October

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The European Central Bank is expected to leave interest rates and its quantitative easing programme unchanged after its governing council meets on Thursday. The strength of the euro has eaten into expectations that the September meeting will be when the ECB starts to address when and how it might trim quantitative easing.

• Policy announcement due at 12:45 BST: press conference starts at 1:30 BST GMT
• ECB main rate stands at 0.00%; deposit facility at -0.4%
• QE bond buying programme runs till end of 2017

Hello and welcome to our live coverage of the ECB’s September rate decision. While we’re not expecting any changes to interest rates today, markets will be watching closely for changes to the ECB’s growth and inflation forecasts, and any comments on the euro’s recent rally, as Mario Draghi and the rest of the executive board decide when to begin trimming the bank’s quantitative easing programme

Today we will get updated forecasts for growth and inflation from the ECB. Here’s what the staff were projecting in June…

It is widely expected that the staff forecast for inflation will be revised down today as a result of the appreciation of the euro.

Claire Jones says that, after months of focus on whether and when the ECB will taper their asset purchases, attention is now turning to interest rates.

Ken Wattret, economist at TS Lombard:

Inflation is still rather low, so the ECB needs to make clear that the hurdle to embark on interest rate rises is much higher than the hurdle to tapering. What Mr Draghi should do on Thursday is put some distance between adjusting QE and raising interest rates. He ought to emphasise that policy adjustment will be very gradual. Otherwise he risks undermining the progress which it has taken such a long time to achieve.

What has happened since the Governing Council last met?

The Eurozone economy grew by 0.6 per cent in the second quarter of this year, compared to the first quarter. Indicators released over the summer continue to point to robust growth, though perhaps slower than at the start of the year.

Employment in Italy surpassed pre-crisis levels for the first time.

A survey of purchasing managers in the manufacturing sector suggested companies across the bloc saw a surge in orders in August despite the strength of the currency.

Business and consumer confidence has also risen to the highest levels since before the financial crisis. The rise in confidence was broad-based across industry, services and consumers.

Inflation rose in August but remains below the ECB’s target of close to but below 2 per cent. Headline inflation was 1.5 per cent in August, with core inflation (stripping out volatile energy prices) at 1.2 per cent.

Analysts’ predictions – the future of QE
Most analysts aren’t expecting any concrete decisions on the future of the central bank’s bond-buying programme this afternoon, but some are expecting Mr Draghi to provide more guidance during the press conference ahead of a formal move later in the autumn. Here’s a round-up of what people are predicting:

BNP Paribas:

We expect the European Central Bank to prepare the ground for an announcement in October that it will reduce its pace of asset purchases. President Draghi will also likely emphasise that monetary conditions will remain highly accommodative for a prolonged period, and that policy rates will only rise well after QE has ended

ING’s Viraj Patel:

If the goal is to curb the current market optimism, then providing some clarity and reassurances that the exit from unconventional monetary policy will be very gentle may be the better road to take. Sure, it may cause a knee-jerk move higher in the euro, but this would quickly fade if – as our economists suspect – the ECB’s tapering options will err on the dovish side of the spectrum


Given solid eurozone growth, sentiment at multi-year highs, reduced political uncertainty, and anticipation of growing technical challenges to the QE programme in 2018, we expect the ECB to start tapering as of January 2018. But we think they will avoid a strong upfront announcement on the time span of tapering, in order to maintain flexibility to act in a data-dependent way and not send an overly hawkish signal to the markets.

Current ECB policy

A quick reminder on where policy and guidance from the ECB currently stands:

The main refinancing rate is 0.0 per cent, the interest rate on the marginal lending facility is 0.25 per cent and the deposit rate is -0.4 per cent. The Governing Council have repeatedly made clear that they expect these rates to remain at their current levels “for an extended period of time, and well past the horizon of the net asset purchases”, in an effort to keep interest rate expectations anchored. But in June they dropped mention of cutting to “lower levels” if warranted.

At the moment, the ECB is purchasing €60bn of eurozone government debt a month and has said this will continue at least until the end of the year. What will they say today about what happens after that?

Analysts’ predictions round 2 – what can Mario Draghi do about the euro?
The euro will be the elephant in the room when Mr Draghi speaks to reporters later. The single currency has strengthened rapidly in recent months, a move which is likely to push down inflation by making imports into the eurozone cheaper. The ECB president has already declined a few opportunities to talk down the currency, but there’s little agreement on how he’ll address the issue today:

The consensus expects Draghi to push back against euro appreciation – we are not so sure. To do so would require an emphasis on lower-for-longer guidance which seems incongruous with the good news story of firm GDP and the goal of QE taper/exit.

Lee Hardman at MUFG:

The ECB’s staff forecasts for inflation in 2018 and 2019 are likely to be revised only ‘marginally lower’ which suggests those looking for stronger pushback against the stronger euro at the current juncture could be disappointed. The key question for the euro is whether a lack of information today from the ECB will be sufficient to trigger a sustained break above $1.20

Bank of America Merrill Lynch:

While some fudging could be done to keep the inflation forecasts for 2019 almost unchanged, the appreciation in the currency will in our view force a significant downward revision for 2018. This would in our view offer a perfect opportunity for Draghi to alter the language in the prepared statement.

Explicitly acknowledging the impact of the currency appreciation on inflation if only as a new risk to the baseline, would allow the ECB to engage in some more straightforward “verbal intervention”, for instance borrowing from the old Trichet’s playbook: the notion that ‘while the exchange rate is not an objective of monetary policy, it is one of the parameters the central bank needs to take into account.

Markets watch – euro climbs ahead of the meeting
If the currency market is anything to go by, traders aren’t expecting Draghi to take a strong line on the euro today, despite speculation he would try to talk it down after its recent rally.
The single currency was already making decent gains against both the dollar and the pound this morning, before upward revisions to the eurozone’s second quarter growth figures gave it a further boost (read more here).
The euro is up 0.55 per cent at publication time, at $1.1980, not far off the more than two and a half-year highs it hit at the end of last month.

Claire Jones explains (via the medium of video) how unwinding QE could affect different Eurozone economies.

ECB keeps rates on hold

No change. The ECB has kept all its main rates unchanged this month, as expected. Here’s where we stand:

- Deposit rate: -0.4 per cent
- Refinancing rate: 0 per cent
- Marginal lending facility: 0.25 per cent

All eyes now will be on the press conference, which starts in 45 minutes (watch it here)

Absolutely nothing has changed

The ECB’s statement today is identical to the July statement. Not a single word has been altered (apart from the date).

Euro gains trimmed after decision

The euro marginally trimmed its gains after the ECB’s decision was released, fastFT’s Adam Samson points out. The currency eased back to a 0.47 per cent daily rise against the dollar at $1.1972, down from a high of $1.1994 just before the release.

Any real moves, however, will hinge on what Mario Draghi says – or doesn’t say – at the press conference. As Katie Martin writes here, even a lack of comment from the ECB president would likely be taken as big news, opening the door for a further jump in the currency.

There was not a lot in the ECB’s statement to go on but here’s some immediate reaction from analysts…

Carsten Brzeski, ING

Whether and how much ECB president Draghi will talk about tapering in his introductory statement and the Q&A session will highly depend on the weight the ECB attaches to the euro exchange rate…The ECB is probably not concerned about the past appreciation of the euro but rather about the future appreciation. In this regards, to get out of the euro trap, don’t be surprised if Draghi presents a more detailed game plan [for tapering QE] than market participants expect.

Claus Vistesen, Pantheon Macroeconomics

We don’t expect any concrete information today on how the ECB intends to tweak QE at the beginning of next year. But Mr. Draghi will be squeezed and pushed to provide hints on what options the central bank is considering. We think the ECB will signal today that it is tasking working groups to come up with proposals to be delivered in Q4, but otherwise that all options are on the table.

Jennifer McKeown, Capital Economics

President Draghi will almost certainly say that some Governing Council members are still concerned about the currency’s strength and he might highlight that the rise has been driven partly by geopolitical rather than purely economic factors. But he is unlikely to imply that the appreciation has prompted a major shift in the Council’s view.

Markets think Draghi will continue to disappoint the banks

The bosses of Deutsche Bank and ING – along with Germany’s finance minister – all called on the ECB to speed up the path to policy normalisation yesterday, with Deutsche’s John Cryan telling a conference in Frankfurt that “the era of cheap money in Europe should come to an end”.

Low rates have weighed on banks’ profitability, but futures markets suggest Mr Cryan is likely to be disappointed for the foreseeable future. The strong euro has left many analysts convinced that the ECB will emphasise its commitment to rock-bottom rates even as it winds down bond purchases. At the start of the year investors were almost certain that rates would begin rising at some point next year, but interest rate futures now imply a less than 50 per cent chance that there will be any rate hike before 2019.

Even though the press release left the wording of the policy statement unchanged from July, Mario Draghi could still reveal in the press conference that they have been giving more thought to how and when policy could be changed.

Frederik Ducrozet points out that this was what happened in September 2016

ECB dovishness puts pressure on its neighbours
Any comments on the future of QE or low interest rates from Mario Draghi today won’t just have repercussions for the eurozone. In the other major central bank decision of the day, Sweden’s Riksbank resisted calls to bring forward its own plans for rate rises, despite a booming local economy.

The Riksbank lifted its growth forecasts and said inflation will be close to its target for the next three years, but the bank is scared of raising rates before the ECB does. The fear is that if Sweden moves before the eurozone, investors will pour into Swedish assets and drive up the value of the krona, pushing inflation way down. But economists and financial watchdogs are worried that the dovishness risks overheating the local economy.

Read more on that here

‘Bright blue tie of action’, or ‘boring brown’?
One perennially popular and totally accurate way to gauge expectations during the ECB’s press conferences is reading the hidden meanings behind Mario Draghi’s neckwear.

At least one ECB-watcher is optimistic of some excitement today, with fastFT’s Katie Martin predicting we’ll see “the bright blue tie of action”

Katie has sadly been proved wrong – it is the purple tie

Economic growth forecasts upgraded, inflation outlook lowered ‘slightly’

The ECB doesn’t expect the strong euro to weigh on economic growth over the next two years, but will bring down inflation ‘slightly’, according to the bank’s latest projections.

Draghi’s opening remarks

In his opening remarks, Mario Draghi said that recent volatility in the exchange rate “represents a source of uncertainty which requires monitoring” because it “has implications for the medium term outlook for price stability”. He also cautioned that measures of underlying inflation “remain at subdued levels”.

He said that, while the chance of stronger than forecast growth have increased, downside risks remain. In particular, he pointed to risks around global macroeconomic developments and “developments in foreign exchange markets”.

He concluded by stressing once again that there continues to be a need for a “very substantial degree of monetary accommodation to secure a sustained return of inflation” to target.

Euro passes $1.20
Mario Draghi might have flagged the ‘uncertainty’ caused by the euro’s strength, but news that the ECB doesn’t expect it to have a large impact on inflation or growth over the next few years helped the euro hit new highs for the day, hitting a high of $1.2018

Draghi confident on inflation but low rates need to last
Most of the ECB’s executive board raised “concerns” about the strength of the euro during the policy meeting, Draghi says, but despite the “broad dissatisfaction” they remained confident that “inflation will eventually converge with our target”.

The ECB president said there were “very preliminary discussions” over plans to change the QE programme but, as suggested below, Mr Draghi also stressed that interest rates will remain low for a long period ahead.

When will we know the future of QE?
Mario Draghi said “the bulk” of decisions on the future of the QE program, beyond December, will “probably” be take in October. But he stressed the need to retain flexibility because risks could materialise.

Financial tightening and the exchange rate
Mr Draghi said that the appreciation of the exchange rate has tightened financial conditions but that these remain “broadly supportive”. He resisted being drawn to confirm that monetary conditions had tightened “excessively”.

Draghi not worried about bond scarcity
The ECB’s board isn’t concerned about running out of eligible bonds to purchase under its QE rules, Draghi says. There have been concerns that the bank will need to begin winding down the bond-buying programme next year even if the economy is not in an ideal position (read more on that here)

But Mr Draghi says such practical issues aren’t a worry:

These doubts were present at the very beginning and we’ve consistently shown that we’ve been able to cope with this issue quite successfully

Draghi says macroprudential policy, not monetary policy, should be used to tackle asset price bubbles
Mario Draghi downplayed criticisms raised by the heads of Deutsche Bank and Goldman Sachs recently, that ultra loose monetary policy around the world was stoking asset bubbles. He said that, with the possible exception of prime commercial real estate, valuations did not looked stretched. Even if they became so, he said macro prudential policy should be the first line of defence. (A similar refrain to what we have been hearing from the Bank of England.)

EUR/USD assumed to be 1.18
Draghi confirms that the ECB staff projections of inflation and growth used the EUR/USD exchange rate from mid-August, of 1.18

Discussions on monetary union reform ‘welcome’
Mario Draghi refused to be drawn on the best ways to reform the eurozone’s “incomplete” monetary union, but said he “welcomed” the recent increase in discussions among member states. French president Emmanuel Macron has called for far-reaching reform of the single currency area including proposals for a new eurozone budget and Brussels-based finance minister, suggestions which have been backed by Germany’s Angela Merkel (read more here).

Mr Draghi said:

The important aspect of current discussions about EMU reforms is that the member states have realised how incomplete is our monetary union at the present time, and how such incompleteness has made the crisis that we are just coming out of more serious.

Draghi dismisses fears that we are in a new low-inflation environment
Mario Draghi robustly defended his belief that inflation will return to the target of 2 per cent. His confidence, he said, was based on the highly accommodative nature of monetary policy and the broad-based robust growth that is now being seen across countries and sectors. What was required was simply “patience” and “persistence” to get inflation back to the ECB’s target.

Here’s that rise in the euro in chart form – the currency is holding onto most of its gains, with Draghi’s confidence that inflation will reach its target offsetting his warnings about euro strength

Mr Draghi tried to play down the suggestion that decisions made by the Federal Reserve about their asset purchase programme would affect the ECB’s decision. However, he said it would, of course, be part of their “information set” when they make any decision later in the year.

I would be cautious about imagining we coordinate our actions, that we play strategic games between us.

What will happen to inflation in 2020?
Mr Draghi said his personal belief is that inflation will “converge to our objective”, of inflation below but close to 2 per cent, in 2020. But he said this had not been discussed at the Governing Council’s meeting.

Euro strength or dollar weakness?
There was no agreement among the ECB’s board on how much of the euro’s recent rally reflects fundamental improvements in the local economy, and how much of it is caused by external factors such as geopolitical concerns. Currency moves that are driven by exogenous factors have a bigger impact on inflation, but Mr Draghi said “there were different views on what is the intensity” of the different factors

Are there any negative effects of QE?
Mario Draghi said they “don’t see” any and, if there were, they would nonetheless have been “vastly offset” by the positive effects on growth.

Press conference summary

There has been quite a bit of speculation in recent weeks about when the ECB will announce their plans for QE beyond December. Mario Draghi made clear today that he fully expects them to be able to lay out details after the Governing Council’s next meeting, on October 26.

The Euro rose against the dollar following the ECB announcements and held on to most of the gains as Mr Draghi spoke. He struck a confident tone on prospects for growth and inflation and said he was not yet overly concerned that the strength of the currency would weigh on inflation, although he said this “requires monitoring”. This clearly convinced the markets that policy tightening is starting to come into view.

Early analyst thoughts
With the press conference all wrapped up, the first economists’ responses are starting to trickle in. Overall there’s a sense that Mr Draghi’s comments won’t have been enough to make the euro reverse course, but he has left his options open to push back harder if it goes too far:

Pantheon Macroeconomic’s Claus Vistesen says:

We think investors should notice that Mr. Draghi openly admitted that the stronger euro is inconvenient, and that it directly translates into a lower inflation forecast.

Mr. Draghi also hinted that the decision on the parameters of QE in part are directly tied to the path of the euro. That is significant signal in our view; it means that the duration and degree of monetary accommodation is now in part a direct function of the euro.

Marchel Alexandrovich, senior European Economist for Jefferies:

the message is that nothing has materially changed, but the softer inflation numbers give the ECB every reason to be patient and persistent with policy, while talking about a tightening in monetary conditions as a way of trying to limit the moves in the euro.

Finally, the ECB has signalled that in October it will likely publish the details of the QE programme in 2018. But Draghi is also very focused on the anchoring of short term interest rate expectations. The ECB knows that as they start to reduce QE, it will be crucial to make sure that borrowing costs for households and corporates don’t spike.

Aberdeen Standard Investments’ Patrick O’Donnell:

Draghi’s probably done enough to slow the appreciation in the euro but not the path of travel, which is up. There’s no question that the ECB is worried about the euro’s appreciation but there’s little he can actually do about it. That’s why the euro has rallied based on what Draghi has said: markets know there’s only so much he can say. Currencies are a relative game and the euro needs help from the dollar or sterling. Unfortunately for Draghi, with the dollar and sterling remaining relatively unloved, the euro will keep going up

Chance of a 2018 rate rise falls to fresh low
Mario Draghi repeatedly stressed the ECB’s commitment to keeping interest rates at their current levels as the QE programme winds down, and his comments have been reflected in market rate predictions.

Interest rate futures now imply just a 34.2 per cent chance of any rate rise next year, according to Bloomberg data. That’s down from 46 per cent before the meeting started, and marks a fresh record low.

Euro trims gains as eyes turn to October
And that’s a wrap.

The euro gave up some of its gains as the conference came to an end, but is still up around 0.76 per cent for the day, just above the $1.20 mark.

As predicted, today’s meeting gave us a preview of what’s to come as Mario Draghi said the ECB’s board had begun “very preliminary” discussions of how to wind down its bond-purchasing programme, but the real decision is likely to come next month. Until then, here’s Claire Jones’ report on today’s events from Frankfurt.