Closed ECB March rate decision – Live

A live blog from

Welcome to the FT’s live coverage of the ECB’s March interest rate decision. We are expecting the announcement at 12.45 London time, followed by Mario Draghi’s press conference at 1.30.

Here’s the ECB decision in January, as a useful compare-and-contrast reference:

Let’s have a look at a few thoughts from analysts about what kind of changes to the ECB’s language that we should be looking out for. To start with, Morgan Stanley:

“We believe that the press conference on March 8 will likely see some small changes to the central bank language, to prepare the markets for the end of QE in 4Q18. At a minimum, we think that the Q&A will likely emphasise that things are getting better and so, implicitly, that the degree of monetary accommodation can diminish. A stronger signal, either in March or in April, would be to modify the QE forward guidance, by no longer mentioning that the ECB stands ready to buy in bigger sizes again, if required, and just continuing to refer to the possibility of buying for longer, ie, a short taper.

“The growth and headline inflation numbers are likely to be revised down marginally in some of the outer years, on the back of the new assumptions for FX and oil prices.”

There are no immediate economic policy problems facing the ECB this month. As the graph below demonstrates the central bank has avoided deflation and unemployment is coming down steadily.

Growth figures published yesterday showed that the eurozone grew at a slightly slower pace than initially thought during 2017. Eurostat, the EU’s statistics body, revised growth down from a ‘flash’ estimate of 2.5 per cent to 2.3 per cent. However that’s still up from growth of 1.8 per cent during the previous year.

The ECB will be publishing its latest set of forecasts today. In December the central bank forecast growth of 2.3 per cent this year, 1.9 per cent in 019 and 1.7 per cent in 2020. They predicted inflation would rise steadily from 1.4 per cent in 2018 to 1.5 per cent in 2019 and then 1.7 per cent in 2020.

Some thoughts from UBS:

“With the macro forecast largely unchanged, we think the ECB will not make big changes to its communication. Mr Draghi is likely to stress “patience and persistence”, while reiterating that the ECB’s focus will gradually shift from QE to interest rates (forward guidance) and reinvestment of maturing QE securities as key instruments for returning inflation back to the target.

“Echoing a recent speech by Peter Praet, Mr Draghi is also going to refer to “convergence, confidence, and resilience” as the three criteria for the inflation outlook. Meaning: inflation needs to converge towards the target over the medium term, but in a lasting and self-sustained manner, even if monetary policy conditions were to become less supportive. Mr Draghi is also likely to reiterate that, over time, the ECB’s focus will shift from QE to interest rates (forward guidance) as the key instrument for returning inflation back to the target. Key ECB policy makers such as Benoît Cœuré and Peter Praet hinted at this shift as early as November. In parallel, the ECB is likely to stress the importance of the reinvestments of maturing securities of its QE portfolio.

“As a note of caution, we would argue that if indeed the ECB does not make substantial changes to its message [in March or April] it might create a risk that it will have to change its communication more substantially during the summer if our call is correct that QE will end in September.”

Frankfurt correspondent Claire Jones has very helpfully written up four key things to watch at this meeting.

As well as the forecasts, attention will be focused on how the ECB will tweak its message over how it plans to scale back quantitative easing and whether there is any reaction from the central bank to the Latvian banking scandal or the elections in Italy.

You can read her preview here.

The ECB has scaled back its asset purchases since the start of the year, from €60bn a month to €30bn. This is the latest step in its bid to unwind the unconventional monetary policy measures that have been in place since 2015. So far the effect seems to have been that corporate bond purchases make up a greater proportion of the overall buying. Here’s a chart showing how the scaling-back is working in practice:

At pixel time the euro was down about 0.27 per cent against the dollar in today’s trading session.

For the year as a whole the single European currency has gained about 3.4 per cent against the dollar, mostly during January. It’s bumped around the same level since.

The strengthening over the past year or so has been largely due to the strength of the eurozone economy and rising expectations that the ECB will tighten sooner than expected after a period when monetary policy diverged and the Federal Reserve was tightening while the ECB eased.

Five minute warning The rates announcement will be made in five minutes.

Some thoughts from RBC Capital Markets, who think the ECB might decide to tweak its language on asset purchases in particular:

“The accounts of the January meeting indicated clearly that there is a willingness amongst the GovCo to deliver an evolution of the various parts of the forward guidance language ‘early in the year’. The timing of this meeting is likely to qualify for that description.

“What we see as the most important element of the language, the last part on sequencing which binds the (end of the) QE programme and the path of interest rates, is unlikely to be changed.

“Continuing to reference an economic deterioration seems somewhat out of place at present, especially at a time when the ECB has recognised the strength of the recovery.

“Furthermore, we think that dropping the reference that the APP could be extended would hardly do much harm to the market. It is generally recognised that the ECB does not have unlimited ammunition left anyway and the market has all but discounted any increase in the monthly purchases.

“Hence, dropping the reference to a potential increase of the net purchases seems like a good way of modernising the forward guidance without much risk of an adverse market effect.”

Here is the full announcement:

The ECB has dropped its easing bias. The new monetary policy decision no longer includes the paragraph below from the December meeting (emphasis mine):

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 asset purchase programme (APP) in terms of size and/or duration.

What this means

There has been no change to monetary policy but the ECB has changed what is known as “forward guidance” in the parlance of central bankers. This is the message it sends to markets about the future direction of monetary policy.

No longer is it indicating that it will increase the size of its asset purchasing programme if economic conditions worsen.

A comparison of the text of the two announcements is below. New statement on the right, old one on the left.

The markets have begun to react to the removal of the language on the possibility of further monetary policy easing. FT markets reporter Michael Hunter says:

The euro moved back up to the flatline as investors absorbed the statement, leaving it unchanged over the day $1.2412. Immediately before the announcement, the shared currency was down 0.3 per cent. Over the year to date, the euro has rallied just over 3 per cent against the dollar, on expectations that the strengthening eurozone economy will give the ECB more room to catch up with the Federal Reserve as global central banks tighten monetary policy. The change of language underlines such expectations.

The euro is up as traders react to the ECB announcement:

Eurozone core bond yields have ticked upwards in response to the ECB announcement. The yield on 10-year German and French debt is up more than 3 basis points. Peripheral yields have seen a more muted move, with the Italian 10-year yield rising b 0.5 basis points and the Spanish yield approximately flat.

The euro has bounced back from earlier losses. Before the ECB announcement it was down 0.3 per cent against the dollar on the day; in the aftermath of the announcement it rose to 0.1 per cent up, before settling back to its opening level. The euro is 3.5 per cent up against the dollar over the course of this year so far.

Claire Jones has the full story here

President of the ECB Mario Draghi will be taking questions from the press at 1.30pm London time.

Mr Draghi has often followed up hawkish messages in the monetary policy announcement with more dovish statements in his press conferences.

He will also likely face questions from journalists on the Latvian banking crisis, the Italian elections as well as what this change in language actually means for monetary policy. Whether he answers them is another matter.

Looking forward to Mr Draghi’s remarks, Paul Mortimer-Lee from BNP Paribas has put together a helpful press conference bingo card which gives a fair idea of what to watch for.

Here we go … Draghi is onstage.

Mario Draghi is currently reading out his prepared statements and presenting the central bank’s new forecasts.

The outlook for eurozone growth has been revised upwards to 2.4 per cent in 2018 from 2.3 per cent at the December meeting. There is no change to the other years.

Inflation projects have been lowered for 2019 from 1.5 per cent to 1.4 per cent. The rest of the forecasts are unchanged.

Growth projections: 2.4% in 2018 [2.3% in Dec], 1.9% in 2019 [1.9 %] and 1.7% in 2020 [1,7%]

Inflation projections: 1.4% in 2018 [1.4% in Dec], 1.4% in 2019 [1.5%] and 1.7% in 2020 [1,7%]

Rebuilding fiscal buffers, are necessary, Mr Draghi says, particularly in countries where bond debt is high. Steps need to be taken to complete banking union and customs market union.

The first questions are on the changes to the monetary policy statement, the removal of the ‘easing bias’ and on the Latvian banking crisis and how it relates to ECB independence.

Draghi says the sentence was introduced in 2016 when they cut the pace of asset purchases. He reminds everyone how different things were back then.

All in all if you read this decision, which was unanimous. It was substantially a backward looking decision without signals or implications for either our expectations or our reaction functions.

We still expect the key ECB interest rates to remain at their present levels for an extended period of time. They will remain at this level after the asset purchase program has ended.

On Latvia, we don’t have enough information. We are sending a letter to the European Court of Justice.

The governing council has decided unanimously to ask whether the restrictions placed on the Latvian central bank governor have had the effect of relieving him of office.

Next up, Mr Draghi is asked about the fact that the decision to change the statement’s wording was unanimous. Did any policymakers want a more radical change? And on trade, could US tariffs affect the path of inflation?

Mr Draghi says that some people on the ECB council stressed persistence and patience; there was repeated reference to the uncertainty surrounding the path of potential output growth – and therefore the amount of slack in the economy. Because of the mandate of price stability, victory cannot be declared yet despite the strong economic growth.

On trade, Mr Draghi says the immediate spillover effect of trade measures would not be big. But the governing council thinks that disputes should be resolved in a multilateral framework; unilateral decisions are dangerous. There is a concern about the state of international relations. If you put tariffs against your allies, one wonders who the enemies are.
Factors influencing the impact of these measures: is there going to be retaliation? How will the exchange rate react? The dollar has appreciated in the past during trade threats, but things can change. Thirdly, all trade exchanges affect confidence, which is very difficult to forecast.

The markets are moving as Mr Draghi speaks. Our markets reporter Michael Hunter reports:

The euro extended its gains during Mr Draghi’s press conference. The shared currency hit a day high of $1.2466 as he was speaking, up 0.3 per cent on the session. It had been down by the same margin earlier. The move took its year-to-date rally against the dollar to 3.6 per cent.

Mario Draghi is asked about Italy.

“We were so focused on monetary policy that we didn’t discuss this.” He says fiscal stability is of most concern in countries with high debt.

Mr Draghi is asked whether the risks to the inflation outlook have become broadly balanced, and what makes a good ECB president.

On the second question, “I let others judge – it is not up to me”.

On inflation, he says he does not discuss risks to inflation. We see headline inflation driven by more volatile components, and underlying inflation is subdued. The picture is not so different from last time. The decision we took today is backward looking, it does not send any new signal.

The euro is bouncing around, having taken a round trip up and down again in the last couple of hours:

The next question: what has changed in the last seven weeks to merit the removal of the easing bias? And in your experience as ECB president, how much could a new president with a different set of beliefs about QE take the ECB along a different route?

“You keep asking questions as if tomorrow I am going to leave. I still have quite some time before my mandate expires. I may be willing to answer questions about myself at a date that is closer to the end of my mandate than it is today.”

On the first question – we have had several growth outlook revisions and a narrowing of the variance around the convergence path which confirmed our previous confidence. These are really unlikely contingencies now, the ones that would suggest we would activate this easing bias.

Draghi is asked about how the stock and flow of bond purchases interact and asked on the ECB’s role in Latvia and what powers should rest with national central banks and which should rest with the ECB.

Draghi says that the current international anti-monetary laundering regime is unsatisfactory and calls for more multilateral cooperation. Money laundering will be a matter for bank supervisors because it creates legal and reputational risks. He also says that he believes that control over the eurozone’s emergency lending powers should lie with the ECB but it is not something that can happen quickly.

He says that stocks and flows of bonds are complementary. And that there used to be more focus on the flows because the stocks were small, now that has reversed. Flows still matter, he says, because the timing of interest rate changes depends on the asset purchase program.

Draghi is asked about volatility in financial markets.

He says that it was sparked by wage growth data in the US and then amplified by market conditions, especially in equity markets. In Europe the situation is different. We don’t see wage growth of that amount, we don’t see inflation of that amount.

If we make exception for what is happening in the US for market correction, various statements on trade and other issues, we don’t see much volatility in our financial markets in the Eurozone. It is mostly caused by our own statements.

Members of the governing council disagree on when to say things because there is uncertainty about potential growth and labour market slack. Some want to see more data.

Mr Draghi is asked could political instability in countries such as Italy be a problem for growth and stability in the euro area?

He replies that the last few election outcomes showed that markets did not react in a way that undermined confidence. The reaction to the Italian elections have been the same. That is not to underestimate the fact that protracted instability may undermine confidence, which could have a negative effect on inflation and output.

Draghi is asked about the German coalition agreement and whether it might lead to an unwinding of labour market reforms that have helped keep unemployment low.

“All the reforms that have increased productivity and growth ought to be left in place.”

If they had tentative distributional consequences. This distributional effects ought to be taken care. Policies not only in Europe but all over the world have been insufficient to take care of distributional consequences.

The next question: it’s the Italian elections again. Are you worried that anti-European forces have gained over 5 per cent of the vote? Could this jeopardise the euro reforms?
Secondly, about International Women’s Day – isn’t it a bit sad that it is always men appointed to the ECB?

On the first question, Mr Draghi does not want to comment. The euro is irreversible and the governing council urges specific and decisive steps to complete banking and capital markets union.

On IWD, Mr Draghi says that gender balance ought to be improved and this ought to happen at all levels. Mr Draghi congratulates Mr De Guindos for being confirmed by the council and he is going to be a very good colleague.
We are working on improving our gender situation, he says, and there will be a press release stating what sort of initiatives we have taken. We have made significant progress since we set explicit targets but still this progress is less than what we wish and the numbers now fall short of our interim targets. So we introduced gender targets in 2013 and at the end of last year 27% of management positions – interim target was 29%. For most senior roles, the share was 17% versus interim target of 24%. So we have got to do some work here.
There have been various initiatives. One is to ask the headhunters to focus on gender in the recruitment process. Another is to motivate business managers to keep vacancies open until the objective is reached. Recruiting panels will now have a considerable presence of women. Often there are unconscious biases that play a role which is why it is necessary to ensure a much more significant presence of women in the recruiting panels.

Draghi asked about risks to growth.

He says that one risk is trade, which has already been discussed. But also adds that financial deregulation is a risk, one that is less discussed these days.

He says in the run up to the financial crisis we had easy monetary policy, as we do now, which was justified by the economic conditions of the time, and financial deregulation.

“I would flag this as one major risk for the years ahead. That we repeat the same mistake.

“The “we” is not right in this context,” he says. European regulators are not on that path but we are talking about a global market.

Mr Draghi is asked whether QE will be extended if core inflation remains below target in the middle of this year, and about economic conditions in Germany.

On QE, he says that net asset purchases will run beyond September if necessary, until the governing council sees a sustained change in inflation. He is reading sections of the governing council statement again.

The second question, he says, is on one country. We look at the eurozone, we only look at individual countries in so far as they are useful to assess our progress towards our objective.

in answer to the final question, Draghi says that sovereign bonds are risky as they learned during the eurozone crisis.

Our experience from the crisis in the eurozone shows that sovereign bonds are not riskless, they are risky and they are in banks.

We have to take this into account. At the same time we want to keep a level-playing field across the world.

“This is a complex issue that people are working on.”

Ok that’s it for Mr Draghi, he has left the stage.

The euro has fully retraced its earlier move and is now back at $1.238, down 0.3 per cent on the day – exactly where it started before the announcement went out.

Core eurozone bond yields are marginally up; the 10-year Bund is up 1 basis point, as is the yield on 10-year French debt. Periphery yields by contrast have shifted downwards slightly. The 10-year Italian yield is down 3 basis points, as is the yield on the equivalent Spanish bond.

Six things we learned

1. The ECB removed its easing bias on asset purchases.

2. Draghi said this was a backward looking move and reflected stronger data.

3. He delivered some thinly veiled criticism of US trade policy and financial deregulation.

4. The ECB are sending a letter to the ECJ about whether the Latvian central bank governor remains in post.

5. The ECB has failed to meet its interim targets on gender balance.

6. Mr Draghi is reluctant to comment on his forthcoming departure from the ECB.

Ok that’s it for today, thanks for joining us as we watched the ECB shift its position on asset purchases away from its previous bias towards easing. To read more, here is our main story.