Closed ECB holds rates in October – as it happened

draghi_italycoin

A live blog from FT.com


Good afternoon and welcome to our live coverage of the ECB’s October rate decision. Just a reminder that as usual we get the policy announcement at 12:45 (BST) 13:45 (CET) followed by the press conference at 13:30 (BST)


No one is expecting a change of course in ECB policy. The statement will almost certainly confirm that the ECB will halt asset purchases by the end of the year and keep interest rates at record lows “through the summer” of next year.


Carsten Brzeski, chief economist at ING, says the downside risks “are simply too minor and too premature for the ECB to alter its chosen path”.

In his view, there would have to be “a severe growth accident, an escalation of the Italian crisis or trade tensions with tangible consequences on financial markets before the ECB would change its course.”


While we’re waiting for the decision to drop why not have a read of our preview piece by Claire Jones, the FT’s Frankfurt bureau chief. You can read it here.


The rates announcement today is not expected to generate much excitement.But the test for the smooth-talking Mario Draghi: how to acknowledge signs of weakness in the eurozone economy, the wobbles in global markets and the EU’s stand-off with Italy without generating even more concern.


On eurozone economic performance, the PMIs (surveys of business performance and expectations) have shown what UBS describes as a “worrying loss of momentum”.

UBS said:

We firmly expect [that] data to be a topic in the ECB statement and press conference. Specifically, we are curious as to whether the ECB will stick to its previous assessment that the risks to the outlook are still “broadly balanced”. We would expect Mr Draghi to be asked about potential “contingencies” if growth slows down further.


There are also some big technical questions for the ECB to answer over the next few months. First: how it plans to reinvest the proceeds of bonds bought under QE as they mature. Second: whether its update of the ‘capital key’ – used to calculate how many of each member states’ bonds it buys – will penalise Italian debt.


On a similar note, Daiwa says:

Given recent market and political events, and with euro area economic activity, inflation and survey indicators having started to surprise on the downside again… today’s ECB policy announcements and press conference are likely to be watched more closely than they otherwise might have done. Certainly, Draghi will need to acknowledge that the downside risks to the economic outlook have increased. Indeed, he might go so far as to state explicitly that the risks to the outlook are skewed to the downside.

But Draghi certainly won’t yet disown the ECB’s most recent economic forecasts, which we consider overoptimistic but were updated only last month.


Draghi could also face questions today about a technical but potentially contentious issue: the capital key, which could help determine how the ECB reinvests maturing debt from its expiring QE programme.
Here’s the rundown from our Kate Allen and Claire Jones.
The key bit:

Frederik Ducrozet, a global strategist at Pictet Wealth Management, said that while the potential sums involved were “peanuts”, there was a risk “that it fuels further anti-euro rhetoric from the Italian government, since Italy will be one of those countries penalised with the updated capital key”.


Emoticon As expected, the ECB has kept policy on hold – key interest rates unchanged and asset purchases to continue at the current monthly pace of €15 billion until the end of December 2018. The statement from the ECB is here. Emoticon


Guidance on the future path of rates is also unchanged – key interest rates are expected to remain at their present levels “at least through the summer of 2019″.


Big shrug from the markets, leaving the focus to fall on Mr Draghi from 13:30 London time.


After dire late session in the US equities on Wednesday followed by a sell-off in Asia today, sentiment recovered somewhat during European trading. Investors will be watching Mr Draghi closely when he appears in Frankfurt in about 15 minutes time. Later on Thursday, the focus will shift to earnings reports from some bellwether technology stocks.

As it stands the Europe Stoxx 600 is treading water, up 0.09%, while S&P 500 futures indicate a slightly higher opening and are up 0.8%. While on the tech heavy Nasda 100 the futures at +1.4% are anticipating a slight bounce


On the currency markets the euro is up 0.17% against the dollar and slightly higher (+0.06%) against sterling.


Pantheon Macroeconomics has a request for the reporters in the room for Draghi’s presser:

We hope journalists ask Mr. Draghi a simple question. Is the ECB targeting headline or core inflation? Recent communication suggests that the central bank is more confident that inflation pressures are increasing, despite still-low inflation and the fact that it has lowered its core rate projections in the past 12 months. This is true if you look at the headline, but the core rate remains low compared to an ambition to drive underlying inflation up to “close, but below” 2% on a broad-based and self-sustained basis.

The details on reinvestment of bond principal after QE ends at the end of the year also will be a source of debate during the press conference, though we suspect we have to wait for the December meeting for the full details.


OK. Here comes the press conference. For those watching in black and white, Mr Draghi’s tie today is blue.


Incoming information – though weaker than expected – is consistent with ongoing expansion of the eurozone economy and rising inflationary pressures, Mr Draghi says.


Near term growth may be affected by some sector specific developments, Mr Draghi says, but monetary stimulus is supporting domestic demand. Business investment and housing investment is robust. Global growth will support exports, if at a slower pace. Risks to the outlook are still “broadly balanced”.


Inflation will hover around the current level in coming months. Domestic cost pressures are strengthening with labour markets tightening. Underlying inflation is expected to pick up towards the end of the year and increase further over medium term, with rising wage growth.


Draghi has some fodder for the bears here, noting that “risks surrounding the outlook” are “broadly balanced” but… also with protectionism, stress in emerging markets and financial market volatility, all “prominent”.
Expect him to take a few questions on this once the prepared remarks are over.


Draghi:

An ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term


Draghi is fine tuning his message in response to a question:

“we are talking about weaker momentum, not a downturn”


There are a bunch of uncertainties contributing to weaker recent data, Mr Draghi says – trade, Brexit, Italy and simply a return to a more normal pace of expansion after the eurozone grew above potential at the end of 2017. So it is not simple to distinguish what is transitory and permanent, country specific or not.


Again elaborating on his slightly more cautious assessment of the outlook, Draghi said:

Yes, there is weaker momentum. But is this enough of a change to make us change the baseline scenario? The answer is no. These risks are not being considered enough to change he balance of risk.

He also said that Italy was not heavily discussed in the rate-setting meeting.

Draghi also reported that Valdis Dombrovskis, European Commission VP for the euro, who was attending the meeting, said that he was “seeking a dialogue” with Italy.


Markets do not seem too troubled by Draghi’s “weaker momentum” line. The euro is hovering around the day’s high at $1.1420, up 0.3% on the day


Draghi is answering a question on whether there has been contagion from Italy to other bond markets. He says there has been an increase in interest rate in some other countries. It is not material but it is there. The issue is: what is the cause?


Draghi is asked what justifies his confidence on inflation. He says there is evidence that wage increases are here to stay. The labour market is “tighter and tighter”. But ample monetary accommodation is still needed for inflation to converge with the ECB’s target.


We have not talked about any extension of QE beyond December, Mr Draghi says.


Draghi is seeking to allay any concerns about the wind-down of the ECB’s bond-buying programme. “Monetary policy will remain very accommodative, especially with reinvestment and our forward guidance about interest rates.”

And further on Italy, he said he doesn’t have a “crystal ball”, but if Italian government bonds keep falling, then yes, Italian banks will feel the pain.

These bonds are in the banks’ portfolios. If they lose value, they are denting into the capital position of the banks. It’s obvious. That’s what it is.

I’m still confident an agreement will be found. [But] yes [if the bonds weaken], you have dented cap positions… and all of this will translate into different lending terms.


The FT’s Claire Jones asks what the ECB’s options are if the newsflow and data remains poor. Draghi says they have not yet discussed what they are going to do next. The ECB still has tools it can use.


A question about the capital key (on which, more here.) Draghi has batted it away, particularly in reference to its potential impact on Italy, saying it “was not discussed”. But he acknowledged that it is in line for a rejig, and noted that process will be affected by Brexit.

Separately, he gave a plea for politicians to respect central bank independence:

Central bank independence is a precious thing. It is essential for the credibility of central banks, and credibility is essential for effectiveness.


How much guidance should the ECB give, Mr Draghi is asked. Guidance on the path of rates “has served us very well”, he says. By and large, the experience has been positive.


Is Mr Draghi “frustrated” at slow progress on eurozone reform, he is asked.

His reply: Our monetary union is fragile while it is incomplete. But this is not something bureaucrats can push by themselves. These are big changes in the way powers are distributed – we have to be patient because we are not driving this.


The governing council hasn’t discussed the capital key, Mr Draghi says, but he would be surprised if they were to use a different concept when it is recalculated.


The ECB chief has also taken a question about whether the end of QE will unsettle the bond markets. Most bankers and investors agree that the unwinding of the programme has been sufficiently well telegraphed that it should deliver few surprises, albeit with the likely occasional wobble.
Draghi made a neat observation, that the ECB has not been buying Greek bonds, but it has been buying Italian bonds. And yet spread between the two has been narrowing. Clearly, central bank support is not the only influence.


What is the ECB doing on contingency planning for Brexit?
We are not party to the negotiations – and everything depends on the final outcome, Mr Draghi says. We are working with the BOE to monitor the risks of a hard Brexit. It will take an extraordinary amount of preparation to neutralise risks of a hard Brexit. I am confident a solution wil be found but I should warn of another possibility. As the end date approaches, the sector itself will have to prepare on assumption there will be a hard Brexit. There will be “uneasiness” in markets.


Another question on Italy – suggesting the Italian government seems to assume that if spreads widen far enough, the ECB will step in to help?

Draghi’s reply: Our mandate is about price stability, not financing governments’ deficits.


Mr Draghi is asked whether bubbles are developing in markets.

There are certain segments in financial markets where valuations are stretched. Others don’t look as stretched. You don’t see build up of leverage that we did before the crash. We have seen some recent examples of shocks – Brexit being one – where this lower leverage meant banks could carry on lending. But there’s no room to be complacent.


And that’s a wrap.
The euro’s small gains have now been largely unwound, leaving it at $1.1397 after a press conference that demonstrated the ECB chief’s modest confidence but keen awareness of risks from protectionism, EM, Brexit and market volatility along with waning “momentum”.

The ECB is currently on autopilot,” wrote Barry McAndrew, fixed income senior portfolio manager at State Street Global Advisors. “They still see risks as being broadly balanced. Any further messaging on the likely pace of this removal is being kept for next year.”

His colleague Michael Metcalfe, head of macro strategy, said: “Under current market conditions, where there is tentative evidence of Italian troubles leaking into Spain, it is what the ECB is not saying or doing that is perhaps the most noteworthy. There are few signs that the ECB will reinstate the Outright Monetary Transactions (OMT) or a similar policy tool that would allow them to quell a dislocation in fixed income markets without a country first being part of a full bailout program.”