Closed ECB keeps rates on hold in October – as it happened

European Central Bank asset purchase, rate decision

A live blog from FT.com

Welcome to the FT’s live blog covering the European Central Bank’s latest monetary policy decision.

After several meetings without any change to policy, today the governing council are expected to announce some changes. Stay tuned for coverage of the run-up to and aftermath of the announcements.

The FT’s Frankfurt bureau chief, Claire Jones, runs through what she is expecting from Mario Draghi today.

The task facing the eurozone’s 25 monetary policymakers and ECB president Mario Draghi is how to step back from the massive bond-buying exercise known as quantitative easing without alarming investors and harming the bloc’s economic recovery…with QE slated to run until the end of the year, the question is what happens in 2018?

The members of the governing council are divided over whether to announce that QE will end next year or clearly signal that it could continue longer if needed: Claire Jones explains the arguments on each side.

The policy announcement is due at 12:45 BST, with the press conference starting at 1:30 BST.


The taper?

The ECB is widely expected to announce when and how it will start reining in its quantitative easing program today. At the moment, the ECB buys €60bn a month of eurozone bonds and has said this will continue “until the end of December 2017, or beyond, if necessary”.

Analysts predict that monthly asset purchases will be cut to between €20bn and €40bn in 2018.

Kathleen Brooks, City Index:
“Overall, the market expects the ECB’s balance sheet to extend by no more than EUR 300bn in total next year.”


“Lower for longer”?

One of the governing council’s chief concerns is how to avoid the euro appreciating further. If the single currency increases in value, prices in the eurozone will fall, making the ECB’s task of hitting their 2 per cent inflation target even harder.

This issue was fresh in council member’s minds at their last meeting in September following after the euro appreciated strongly against the dollar up to the end of August. In the press conference following the last governing council meeting in September, Mario Draghi mentioned the exchange rate 18 times.

Partly to avoid running out of assets to buy, a longer period of asset purchases would be accompanied by lower monthly purchases.


A fine balance

Announcing the tapering of QE without triggering an appreciation of the euro or anything like the US taper tantrum of 2013 will require a fine balance.

Analysts at Allianz Global Investors:

The ECB bought far more net government bond issuance than the Fed ever did, so the impact of tapering won’t be neutral.

Most analysts expect the governing council to adopt a “lower for longer” strategy – pre-announcing a step down in monthly purchases and a provisional end date…

Analysts at UBS:

We expect the ECB…will cut its monthly asset purchases from €60bn to €30bn as of January, with a commitment for nine months, i.e. until end-September 2018.

Elwin de Groot, Rabobank:

We expect the ECB to announce a tapering policy for its asset purchase programme, which will be wound down in three steps of €20bn, bringing monthly purchases to zero by the second half of 2018.

Robert Bergqvist, SEB:

Our off-consensus view [is] that QE will be extended by six months to June 2018 and ‘re-calibrated’ to a monthly volume of €40bn.

… but there are other options:

Jonathan Loynes, Capital Economics

One [option] is to announce the reductions one step at a time, in the style of the US Federal Reserve. That would give it more flexibility to speed up, slow down, or even abandon the process in response to changes in the economic outlook. An alternative option would be to announce a bigger initial reduction in purchases – perhaps from the current €60bn per month to €40bn or €30bn – but to leave the plan open-ended. That would be more of a step than a taper.


What else will markets be watching?

The main concrete policy announcement is expected to relate to the size and duration of asset purchases. But markets will also be closely scrutinising: the governing council’s language, particularly as it relates to forward guidance on interest rates; the ECB’s willingness to loosen policy further if circumstances change; and whether the ECB will alter the composition of their asset purchases.

Analysts at ING:

Ideally, the ECB would like to announce tapering as noiselessly as possible, limiting any upward movement of interest rates and the euro to a bare minimum…we expect Draghi to emphasise ‘sequencing’, i.e. the fact the ECB will not raise interest rates before the end of QE.

Marchel Alexandrovich, Jefferies International:

The monthly QE run-rate for 2018 is just one part of the overall package the markets will scrutinise. There will be equal focus on the language around forward guidance, Draghi’s tone in the Q&A and any clarity around the reinvestment flows from maturing bonds already in the QE portfolio…Draghi will speak of an ‘adjustment’ to QE (rather than a ‘taper’), which means that forward guidance can remain more or less unchanged in terms of the wording – i.e. the programme could be extended, or its monthly size increased, if required.

Analysts at Allianz Global Investors:

The ECB is aware that tapering is an extremely sensitive issue for the markets, and it is therefore likely to emphasize that reductions in its bond-buying programme will be more conditional than automatic.

Claus Vistesen, Pantheon Macroeconomics:

We are also interested in hints that the ECB will tweak the composition of QE next year. The central bank’s self-imposed limits on issuer share means that it will struggle to keep buying sovereign bonds. Our base case, therefore, is that the ECB initially will dial down QE via a reduction in sovereign bond purchases while maintaining or even increasing its purchases of corporate bonds.


The euro has fallen back a bit against the dollar in morning trading.

https://twitter.com/craig_forex/status/923497098385022976


So far this year, the 12:45pm press statement has been a bit of a non-event, with policy unchanged and the previous statement repeated almost word-for-word unchanged. The main event has been the press conference when journalists have probed Mario Draghi for further insight into the ECB’s thinking.

But today is likely to be different. The statement at 12:45pm could provide quite a lot of new detail on what will happen to asset purchases beyond December. Market watchers will also be closely parsing any change in the governing council’s forward policy guidance.


For those with access to Twitter: Frederik Ducrozet has a useful round-up of the various permutations of possible QE policies for next year.

https://twitter.com/fwred/status/920635535449837569


For those without Twitter, here’s the table


EmoticonECB policy announcement

Interest rates unchanged but asset purchases to fall to 30bn euros a month from January. Will continue until September, or beyond if necessary.


The ECB’s announcement that asset purchases will fall to 30bn euros a month from January and continue for at least 9 months beyond that was in line with analysts predictions.

The statement is quite doveish, with the ECB stressing that they will continue to reinvest principal payments and will continue asset purchases for longer than 9 months next year “if necessary”. The governing council also reiterated that they “stand ready” to increase asset purchases “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation”.


Current market reaction

The FT’s Michael Hunter says the ECB’s plan to start withdrawing its economic stimulus policy has met expectations, leaving the euro looking exposed as investors factor in the beginning of the end of quantitative easing. The euro is falling from a five-session high, down 0.4 per cent at $1.1763.


A reminder of where interest rates stand


Policy divergence

Claire Jones notes that the length of the taper of the ECB’s QE policy suggests that the central bank will keep interest rates at their current record lows until 2019, highlighting the gulf in the monetary policies of the eurozone’s central bank and the US Federal Reserve, which has already started to raise rates.


Full detail on the ECB’s announcements

The ECB’s policy statement covered three main points today:

1. Interest rates will remain unchanged.

2. Monthly asset purchases will fall from 60bn euros to 30bn from January and continue at least until September. The size and duration of asset purchases could be extended “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation”.

3. The ECB will continue to reinvest the principal payments “for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary”.

The wording on the last two of these is relatively doveish, trying to make it clear that the ECB is not planning to withdraw abruptly from the bond markets.


Bond market reaction

After pressure earlier in the week on the shared currency area’s government debt, which sent yields on the paper higher, sovereign bonds are in demand after the ECB statement lacked any hawkish surprises. The yield on Germany’s 10-year Bund is down 4 basis points at 0.44 per cent. France’s equivalent paper is yielding 0.850 per cent, down 4.1bp.


Early reaction from analysts

The first analyst reactions are starting to filter in, and the early consensus seems to be that the statement was roughly as expected, with Mr Draghi expected to emphasise his cautiousness in the upcoming press conference.

ING’s Carsten Brzeski described the announcement as “the start of a very gentle exit process” – “the QE recalibration the ECB has announced illustrates that it wants to start the exit as cautiously as possible, ideally without seeing the euro appreciate or bond yields increase.”

Patrick O’Donnell, senior investment manager at Aberdeen Standard Investments, agreed:

Mario Draghi’s main goal for months now has been to gently steer markets into thinking that this tapering would come today. He’s done that so markets take the announcement in their stride, which they will. But he still needs to get through the press conference without sounding too upbeat about the outlook. The last thing he wants now is to sound too bullish so that financial markets continue to think a rate hike will not come until 2019 at the earliest, hoping to stem further appreciation of the Euro in the process. There’s still a long way to go in this Eurozone recovery, Draghi knows that, and he needs to make sure financial markets do too.



Best of the rest: central bank round-up

Today’s press conference comes at the end of a busy run of major central bank updates over the last two days – while the ECB’s peers across the pond have already started a hiking cycle, policymakers in the rest of Europe have been waiting nervously for news from Frankfurt.

The Bank of Canada surprised many in the markets by raising rates two meetings in a row over the summer, but held off on any further increase yesterday. Like the ECB, the BoC has been responding to stronger than expected economic growth since the start of the year, but it expects growth to a more sustainable pace next year.

In contrast, Sweden’s Riksbank has refused to budge its policy despite similarly rapid domestic growth. At -0.5 per cent, its benchmark rate is even lower than the ECB’s and it is still buying large numbers of government bonds, but the central bank doesn’t want to lift rates before the ECB does, as it fears a rally in the krona would ruin its progress in lifting inflation. In a none-too-subtle allusion to today’s events in Frankfurt, the world’s oldest central bank this morning said it would “await further information that could affect a decision in December to possibly extend” its own QE programme.

The pressure to normalise monetary policy pressure is less acute in Norway, which also left rates on hold this morning. Despite falling into another brief recession last year, Norges Bank never lowered rates as far as other banks in Europe, and said on Thursday it expects to keep rates on hold at 0.5 per cent for a while longer.


More reaction and what to look for in the press conference

Carsten Brzeski, ING:

Today’s decision is a sea change but a very gentle one; not a big-bang u-turn in ECB monetary policy. In fact, the QE recalibration the ECB has announced illustrates that the ECB wants to start the exit as cautiously as possible, ideally without seeing the euro appreciate or bond yields increase.

Ken Wattret, TS Lombard:

One of the numerous issues for the upcoming Q&A session is how the ECB could credibly step-up the pace and/or duration of the [asset purchase programme] given the scarcity issue. The credibility (or otherwise) of the response could be an important influence on market perceptions of how likely an additional extension would be.

He added:

Plenty of other hot topics too, including any additional colour on forward guidance/sequencing, the level of dissent on the Council, the latest take on the exchange rate and financial conditions, progress towards the core inflation criteria, the possibility of additional TLTROs to reinforce forward guidance and mitigate the cost to banks of the negative DFR (again prominent in the latest bank lending survey – which also showed diminishing returns from unconventional measures).


Euro down and Eurozone debt up

Though the ECB’s announcement was closely in line with what analysts had expected, there has still been some reaction in the markets to this afternoon’s announcement.

European government debt rallied and the euro weakened after the ECB pledged to keep buying bonds for much of next year. Michael Hunter has the full story here.


Some final reaction before the press conference begins

The consensus among economists (consistent with the reaction in the markets) is that the ECB’s statement is somewhat dovish.

Simon Wells, HSBC

By extending for 9-months and keeping the forward guidance that key policy rates at their present levels until “well past” the end of net asset purchases, the ECB is trying to keep market expectations of rate rises low and, in turn, limit any euro appreciation. The initial market reaction suggests it may have achieved this goal. Moreover, despite falling net purchases, rising reinvestments (which the ECB forecasts will reach around EUR15bn per month) should provide some support to peripheral bond markets.

Jessica Hinds, Capital Economics

The ECB’s…failure to provide a firm end-date was perceived as slightly dovish by investors, helping to explain the initial small fall in the euro exchange rate…with inflation set to remain below the 2% ceiling even on the ECB’s own forecasts, interest rates are likely to stay at their record lows for some time yet… As the ECB has today left the door open for purchases to continue beyond September 2018, we think that rates will stay on hold until at least March 2019.


Draghi’s opening remarks

In his opening remarks, Mario Draghi ran through the ECB’s newly announced policy stance. It was notable that he studiously avoided saying monthly asset purchases would be “cut”. Instead he stressed that asset purchases would “continue” in 2019, albeit at the lower rate of 30bn euros a month.

Mr Draghi pointed to the council’s growing confidence that inflation was on a path to reach their target of close to but below 2 per cent, accompanied by an increasingly robust and broad-based economic expansion.

But he said domestic price pressures remain “muted” and that an “ample degree of monetary stimulus” remained “necessary”.


Inflation outlook

Mr Draghi pointed out that headline inflation is expected to fall later this year as the “base effects” of past energy price rises drop out of the calculations. But he said the ECB’s assessment is that underlying inflation has picked up, although remains below the target of below but close to 2 per cent.


Markets update

The yield on Germany’s 10-year Bund has fallen 4 basis points to 0.44 per cent as Mr Draghi begins his speech. The euro has weakened 0.5 per cent to $1.1752. It may seem strange that global markets are reacting to a central bank decision that almost everyone was expecting but Mr Draghi has been very deliberate to emphasise the need for a cautious taper and markets are listening.


Taper composition

The first question is on the composition of the taper and alternative scenarios considered. Mr Draghi notes that large sums of corporate bonds will continue to be purchased and that as of January 2018 a monthly purchase breakdown will be published for the year – as will details of reinvestment. There were, he adds, no alternative scenarios discussed.


Stock market reaction

European stocks extended their early gains after the announcement. Credit Suisse strategist Sandrine Perret predicted the trend is likely to continue, with investors turning to riskier assets as bond yields remain low:

The euro is trending lower on the news and will likely see further temporary weakness after the decision, while sovereign bond yields are also sliding. The decision will likely favour a risk-on mood in European markets and continue to favour an equity rally.


Sequencing

Mario Draghi said there is no explicit link between the date when interest rates will rise and the date at which they cease reinvesting principal payments. Both will continue “well beyond” the date when net asset purchases cease.


How credible is the ECB’s commitment to extend QE if needed?

Analysts have estimated that there are only around 300bn euros of assets that the ECB could yet buy which comply with their QE rules. So, predictably, Mario Draghi is asked whether it is credible for him and his colleagues to say they stand ready to extend the size and duration of asset purchases further, if needed.

He said they have repeatedly provided evidence that they can and are willing to do more. “We didn’t discuss parameters or limits today,” he said.


What will reinvestments look like?

A question on the size of reinvestments as of September when the official QE programme is expected to come to an end. Mr Draghi says the programme will be flexible. Month to month differences are likely to be sizeable depending on bond maturities. A disclosure later this afternoon will offer more details but no hard and fast numbers.


Does the ECB have much power over domestic inflation?

The FT’s Claire Jones asked Mr Draghi if he agrees with the view – advanced by the Bank for International Settlement among others – that wages are now much more influenced by global factors and less influenced by domestic economic conditions.

If true, this means central bankers have much less ability to influence wage setting – and thus domestically generated inflation – than they did in the past.

Mr Draghi acknowledged that global factors are important. But he said their monetary policy had contributed to helping close the output gap, including by supporting employment growth, which will eventually produce higher nominal wage growth.


How has the ECB communicated its decision

Mr Draghi says the market reaction to today’s announcement seems muted – which indicates that communication has been effective. Replying to a question on whether the decision was unanimous he says no. Discussions included a range of views. While economic data offered positive indications it was tempered by the fact that progress is not yet self-sustained.


Corporate bond purchases

Mario Draghi has confirmed the European Central Bank will still buy “sizable quantities” of corporate bonds after it starts tapering its quantitative easing programme in January.

Speaking to journalists in Frankfurt after revealing the bank’s plans to cut its monthly bond purchases, Mario Draghi said the bank’s executive board did not discuss the exact composition of its bond purchases in the new year, but said the bank will provide more details on the plans in a separate press release after the conference ends.


ECB v Fed

Asked why the ECB has opted for a different approach to winding down asset purchases than the one taken by the US Fed, Mr Draghi says this reflects the differing positions they are in. The US recovery is more advanced than Europe’s.


The Catalan question

Mario Draghi declined to say that the political turmoil in Catalonia was yet creating financial risk in Spain or in the wider euro area. But he said the developments are “significant” and that it is something the ECB is “following” and looking at “with great attention”.


How will asset purchases end

The ECB has been keen to stress in the past that it does not want a cliff-edge end to its asset purchases. Asked whether the taper to 30bn euros a month will end with a sudden move to zero Mr Draghi says no. The decision made today is for an open ended programme – purchases will not stop suddenly.


Euro rises

FastFT reports that the euro has rebounded from a session low as Mr Draghi forecasts “unabated growth momentum” this year.


The three P’s

Asked whether any of his colleagues on the Governing Council were less confident than him about the convergence of inflation towards the target, Mario Draghi reiterated his favourite three P’s: that the policy chosen by the “large majority” of members was “prudent…patient but persistent”.


Could asset purchases be reduced sooner?

Mr Draghi calls the decision to undertake purchases and reinvestments for an extended period a commitment. Such changes are not expected.


Further announcements in December?

Mr Draghi was asked whether there would be further announcements – for example on changes to the parameters of the QE programme – in December. He confirmed that there had been no discussion of either parameters or sequencing at this month’s meeting but declined to say whether there would be in December.


Business Risks

Mr Draghi is asked whether the ECB has considered risks to businesses as asset purchases are reduced. He replies that this is not something that he is concerned about. Corporate bond purchases will continue and the situation will be monitored.


“This is not a tapering”

Mr Draghi said he did not think the word “tapering” had not been uttered in the governing council’s meeting. Reinforcing his dovish messaging he said the programme was “open-ended”, with the latest announcements being a “down size” not a taper.


Supporting Spain?

The ECB has not increased its purchases of Spanish debt to help offset political instability there, said Mr Draghi: “our mandate is price stability”.


Markets update

Investors in Europe’s currency, stock and bond markets have taken Mr Draghi’s comments as indicative that monetary policy in the eurozone is going to stay accommodative for the medium term. The Benchmark 10-year German Bund yield is down 5 basis points on the day at 0.44 per cent. Stocks are slightly higher with the Euro Stoxx 600 up 0.6 per cent and the euro has dipped 0.7 per cent to a daily low of $1.173.


Round-up: What did we learn today?

Mario Draghi struck a positive note when he talked about the eurozone economy today. He pointed to strong growth in the economy and more jobs. But inflation remains below the ECB’s target of close to 2 per cent. This means an “ample degree of monetary stimulus remains necessary,” said Mr Draghi.

Overall, the ECB governor sent a dovish message. He was careful to say that the asset purchase programme is not being tapered. Though he revealed that some members of the governing council were in favour of announcing a definite end date for asset purchases, the “large majority” favoured keeping the programme open-ended, said Mr Draghi.

The ECB will publish further details on plans for future asset purchases this afternoon. But Mr Draghi said there had been no discussion at the meeting of any changes to the parameters for the QE programme. He batted away the suggestion that the ECB had little scope within existing rules to extend the programme beyond September 2018.

Several journalists tried to get a hint about when the ECB will start raising interest rates and stop reinvesting the principal from their asset holdings by drawing parallels to what the Fed have done. But Mr Draghi said there was little that people could learn in that quarter because of the differences between the two institutions, the business cycle position of each economy and labour market differences.

Mr Draghi declined to give any indication of whether any changes to the parameters of the asset purchase programme or further details on the sequencing of future policy moves would be announced in December. You will have to join us back here then to see what he says!


And it’s goodbye from me

Thank you for joining us today for what was far and away the most exciting ECB announcement for a long time. That’s all from us here on the live blog for today but for ongoing coverage go to our main website
and FastFT.