Closed ECB brings QE to an end and holds rates in December – as it happened

draghi_ECB

A live blog from FT.com


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


End of QE

The ECB is poised to declare an end to its historic bond-buying operation today – but there is unlikely to be much fanfare about it.

With the eurozone economy slowing, the big questions for investors are how far the central bank will cut its growth forecasts, and what other tools it might use to support growth next year.


Let’s have a quick recap.

The ECB started to buy eurozone governments’ bonds in March 2015, at a rate of €60bn a month. From April 2016 it stepped that up to €80bn a month, then dropped it back to €60bn until last December, when it was cut to €30bn. In September that fell further to €15bn a month.

The ECB has bought corporate and public sector bonds, asset-backed securities and covered bonds. The total size of its holdings now amounts to more than €2.5tn.


A potted history of QE

The ECB was the last of the major central banks to launch QE – after Mario Draghi overcame fierce political resistance from governments who saw it as bailing out profligate debtors on the periphery. The worry now is that the ECB may be ending the controversial policy more because it has reached the limits of what is politically feasible than because the eurozone’s growth is now self-sustaining.


Clouds on the horizon

With the economic outlook clouding over, the big questions for investors are how far the central bank will cut its growth forecasts, and what other tools it might use to support growth next year.

Claire Jones, the FT’s Frankfurt bureau chief, explains what to watch out for here.


Impact on bond yields

The market consequences of QE have been notable: bond yields dropped to record lows, and the spread between core eurozone countries and the riskier periphery was compressed.

The effect was particularly notable because the ECB’s purchases outpaced the volume of fresh debt sold – unlike in the US, where Fed purchases never soaked up all the net new liquidity.


Bonds reinvested

The ECB is likely to confirm that it plans, for the time being, to reinvest bonds bought under QE as they mature. Investors will be watching for any new commitment on how long this will continue. There could also be important, if technical, changes to the policies that guide reinvestment.


The capital key

One of the key things to watch for today is what the ECB decides to do about the capital key. This is the statistical calculation which the ECB uses to determine what contributions the respective Eurozone member nations should make to its capital base; it was also used to determine how QE bond purchases should be distributed across the bloc’s bond markets. The key is recalculated once every five years, and the most recent recalculation took place last month. The ECB must now decide whether to use the old capital key or the new one to determine how it allocates the reinvestment of maturing bonds.

If it uses the new key, it could result in less purchasing of Italian bonds next year than the markets have been expecting, because the Italian economy is a smaller share of the overall Eurozone economy than it was five years ago, when the capital key was last calculated. Given the sell-off in Italian bond markets in the past six months, that could feed through to put a bit more upward pressure on Italy’s yields.

You can read more about the capital key and its impact on ECB bond purchasing here.


Economic situation: biggest unknown

Here’s what some economists are saying ahead of the policy statement.
Carsten Brzeski, economist at ING, thinks the biggest unknown will be the assessment of the economic situation.

“Up to now, ECB senior officials have maintained their relatively upbeat take on the Eurozone economy… In the meantime, the market consensus has clearly shifted to the downside.”


Will QE reinvestment policy change?

Marchel Alexandrovich, economist at Jeffries International, says two things could really matter: any fundamental changes to QE reinvestment policies, and any sign the ECB is preparing another round of “targeted longer-term refinancing operations” – the auctions of cheap cash known as TLTROs.


More TLTRO?

The ECB has used targeted longer-term refinancing operations (TLTRO) to pump over €700bn into Eurozone banks. Italian banks have received a third of that total, and Spanish banks a quarter. There are clear questions about the extent to which the capital markets can replace this financing line when it comes to an end in 2020/21, and that has led to speculation that the ECB could signal another round of TLTRO soon. Investors will be looking for any indication from Mr Draghi today that this might be on the cards.

Here’s our Alphaville blog with a more detailed look at TLTRO and the path ahead for European banks.


Any change to forward guidance

Finally, people will be watching for any change in the ECB’s forward guidance – but this is seen as less likely, at this stage, even if the risks to the economic outlook are now seen as tilted to the downside.
Marc Chandler, strategist at Bannockburn Global Forex, reckons that repeating the forward guidance that rates will not be lifted until after next summer “comes at little cost” – and he points out that “the market has already largely pushed the hike from late 2019 into 2020″.


Eurozone growth

Here’s the Eurozone’s recent economic growth performance:


Inflation path

And here is the recent path of inflation.


Oil price driving inflation

Inflation – which undershot target for years – is now very close to the ECB’s target. But much of that has been about the last year’s surge in oil prices.


ECB confirms QE to end

Emoticon The decision is out – and QE is set to end as expected in December.


ECB statement

Here is the ECB statement in full:


More guidance on bond reinvestment

The governing council will put out more guidance on the reinvestment of bonds that mature – the ECB will continue reinvesting the principal payments in full “for an extended period of time past the date when it starts raising the key ECB interest rates”.


Market reaction

Our markets reporter Michael Hunter says:

The euro ticked higher as investors looked through the ECB’s statement. The shared currency was up 0.1 per cent at $1.1385 immediately after publication of the statement, which lacked any major surprises.


Rates unchanged till next summer

Key interest rates are unchanged – as is the guidance that they will stay there “at least through the summer of 2019″.


Press conference starts at 1:30pm GMT

All eyes now turn to the press conference which takes place at 1.30pm (London time). Mr Draghi will set out the ECB’s monetary policy decisions and answer reporters’ questions about the rationale behind them and the outlook for the future.

Key points that investors will be watching for include some technical detail on the reinvestments of the ECB’s maturing QE holdings, the prospect of further financing for Eurozone banks, the bloc’s growth outlook and the sustainability of current levels of inflation.


Geopolitical view

Another interesting issue which reporters are likely to press Mr Draghi on is his view of the European political situation.

In Italy, political events have driven bond yields up sharply in recent months in a succession of selloffs. Yields shifted downwards in recent days as the prospect of a standoff between Rome and Brussels over the Italian coalition government’s budget plans has ebbed. But they remain elevated in comparison to those of core nations such as Germany.

Investors’ fears about Europe’s geopolitical tensions have also been fuelled by President Macron’s promise this week to step up French public spending in a bid to assuage violent protests which have gripped the nation. That move puts Paris on a potential collision course with Brussels over its public spending too.

With European Parliament elections taking place across the continent next May, the political temperature is likely to rise in the early months of next year as campaigning gets underway amid fears of rising populism across the continent.

Mr Draghi could be pressed on the fiscal consequences of public pressure to increase government spending.


ECB’s ‘masterly communication’

The lack of market reaction to today’s statement will be a matter of quiet satisfaction for the ECB. After all, as ING’s Carsten Brzeski notes:

“What looks like pure boredom is, in fact, the result of masterly communication, setting itself on auto-pilot and preparing financial markets… the ECB has managed to shelve the first unconventional crisis tool without distorting markets or the economy. Contradicting fears of market turbulence or surging bond yields, the ECB managed to end QE, and no one seems to care.”


Press conference about to start

Mr Draghi has arrived and is about to start speaking.


Draghi: geopolitical factors among ‘prominent risks’

In brief: Incoming data has been weaker than expected – but domestic demand still underpins growth and inflation. Geopolitical factors, protectionist threats and market volatility are still prominent risks. Significant stimulus is still needed. We are providing it – and stand ready to adjust all instruments as appropriate.


Real GDP slowing

Now for the economic analysis. Euro area real GDP slowed from 0.4 per cent to 0.2 per cent in the third quarter. The latest data has been weaker than expected due to weaker external demand and country-specific factors. Growth momentum may be slowing. But the labour market is still strong – reflected in job growth and rising wages. Business investment is rising. Residential investment is strong and global growth is set to continue, even if export growth will slow.


GDP outlook ‘slightly worse’

Euro area GDP growth forecast at 1.9 per cent this year, 1.7 in 2019, 1.7 in 2020 and 1.5 in 2021. Outlook slightly worse than previous projections for 2018 and 2019. Risks are moving to the downside.


Headline inflation to dip on oil price fall

Due to the decline in the oil price recently, headline inflation is likely to dip in the coming months but underlying factors including wage growth remain in place, Mr Draghi says.

The forecast is for annual inflation of 1.8 per cent in 2018, 1.6 per cent in 2019, 1.7 per cent in 2020, and 1.8 per cent in 2021. The outlook has been revised slightly up for 2018 and down for 2019.


Euro slips

The euro is slipping as Mr Draghi speaks, our head of FastFT, Adam Samson, reports:

The euro slips as Mr Draghi says the balance of risk is ‘moving to the downside’. The euro is off 0.12 per cent against the US dollar at $1.1355.


More information capital key out at 2:30pm GMT

Mr Draghi says that further information on technical aspects of reinvestment of maturing QE bonds will be published at 2:30pm GMT or 3.30pm (CET), when this press conference has finished. That’s likely to be a reference to the capital key.


Q&A starts

The first question to Mr Draghi is pressing him to give us a preview of that information that’s due to be released at 3.30pm.


More on capital key

Mr Draghi agrees to give a little more information now. Repurchases will be made in the same jurisdiction as the maturing debt, he says, and purchases will be made on the basis of moving towards a closer alignment with each nation’s position in the capital key. That suggests the new capital key will be used – but it sounds as though there will be some flexibility in achieving that.


Economic risks ‘focal point’ of discussion

On the economic risks next year, Mr Draghi says that was the “focal point” of the discussion. “Continuing confidence with increasing caution” is his summary of the governing council’s view. Monetary policy is still very accommodative. And the drivers of the recovery are still in place, with consumption growing, supported by higher real incomes. Business investment is growing and so is external demand. “It is just weaker” – not just as a one off, but it has been weaker for a while.


‘Increased general uncertainty’

The governing council thinks there are some one off factors behind the weakness, but also some more lasting ones, Mr Draghi says. The sources of uncertainty may change. The trade situation is probably better than two months ago; likewise some risks to emerging markets. But the overall atmosphere is of “increased general uncertainty”.


Reinvestments vs TLTRO

Next question: first, on reinvestments – you say they will increase in full until after the first rate hike, can you give some detail of how long that period will be? Second, you link continued reinvestment to the need to maintain favourable liquidity, does that mean reinvestments alone will be enough for that and therefore no further TLTRO or other liquidity operations will be necessary?

Mr Draghi says that, on the first question, if we had wanted to specify a length of time we would have done so. He won’t speculate on general understanding of what the ECB’s wording means. Secondly, no – TLTROs were mentioned in the ECB’s discussion. This is another instrument of monetary policy and we will continue to reflect on that and other measures. Reinvestment will be a major contributor to maintaining monetary policy as ‘accommodative’.


Euro dips

Our FastFT desk has charted the move in the euro as Mr Draghi was making his opening remarks:


Tools for the downturn

Next question is whether the first rate rise may be pushed back; and whether the ECB has the tools to deal with the next downturn.

Yes, we have the tools, Mr Draghi says. Our forward guidance is contingent on the state of the economy. If the market’s pricing of rate hikes changes, that is because of the market’s reading of the general situation of the economy.


Impact of higher wages on inflation

The next journalist asks Mr Draghi about inflation. Are you not concerned that it might take much longer until higher wages feed into the inflation rate? And on reinvestments – were some members in favour of setting out to amend the ECB’s plans?

The decision was unanimous, he says, which was important.

On inflation, he says wages have been steadily increasing since 2016. It is quite broad-based and across sectors. In certain countries however the higher growth rate in nominal wages is even more significant – Germany for example. So you would expect this would be passed through into higher prices at some point. How fast depends on a number of factors including the extent to which profits are being squeezed by rising wages and other production costs. Parts of the eurozone closer to full employment project higher nominal wage growth and squeezing profit margins. We expect the pass-through will happen but not uniformly across the region.


QE ‘crucial’ in reducing asset risk

The FT’s Claire Jones asks how successful QE has been over four years. Also about the market’s view on downside risks – contrasting with the ECB’s confidence.

Mr Draghi says QE has at some points been “the only driver of this recovery”. Interest rates had fallen dramatically even before QE; but QE was crucial in reducing the asset risk of the eurozone banking system.


ECB’s rate outlook vs the market

On the gap between the ECB’s outlook and market expectations, Mr Draghi notes that surveys still show expectations centred on the first rate hike coming around next summer. The markets have a more downbeat view on the economy and rate expectations reflect this.


Balance of risk

On the balance of risk, Draghi is asked if anyone sought to change the wording to ’tilted to the downside’? And who will be the vice chair of the SSM from February?

The decision was unanimous about the wording, Mr Draghi says, and there is a process on the appointment which we will follow.


Could QE return?

Now a question on whether QE could be deployed again. Also, what is the balance of risks t o inflation?
Mr Draghi says there’s no explicit view on the risks to the inflation outlook. There was no need to discuss future use of QE, since we are confident inflation is converging on target.


Monetary union remains fragile

A question about Italy and France, and the development of the eurozone’s policy structures. Should more be done? And on the process of monetary normalisation – given we are in unconventional negative interest rates, which has an impact on the profitability of the banking system, what is your response to that?

On the second question, we are monitoring carefully whether low rates affect banks’ profitability and to what extent, Mr Draghi says. Until now we’ve drawn the conclusion that negative effects are more than offset by the benefits in other parts of the banks’ balance sheet because of the recovery and the asset purchase programme. One of the main factors that increased eurozone banks’ profitability is increased provisioning which has become possible because of the economic improvement.

On the first question, the completeness of monetary union, we have to be both alert and humble, Mr Draghi adds. Our monetary union is not completed, remains fragile and needs development in banking and capital markets union and fiscal matters. More needs to be done before we can declare victory. Both are important in sharing recession risk and helping stabilise economies. We also have to acknowledge all these decisions are political and they have to be taken by other people. In all this the ECB is in a sense an adviser but cannot be a decisionmaker.


Accidents may happen

A question about asset buying; will there be other programmes, such as another TLTRO? And on high-yield bonds – the ECB holds BBB rated bonds which could be downgraded to junk status. Has this been discussed at all?

No we haven’t discussed other options but we intend to keep liquidity as available as it needs to be, Mr Draghi says. TLTROs were mentioned by the governing council but not discussed in any detail. The council is aware of the factors that will affect liquidity in the next couple of years and at some point we will discuss this.

On the question of bond-holdings, we have a risk management framework which looks at a number of factors, Mr Draghi says. We don’t mark sovereign debt to market, he says, although I can’t answer about how we account for corporate bonds. But we have enough layers of provisions so I think we are pretty safe. But bear in mind we do not buy bonds to make a profit, it’s for monetary policy. So accidents may happen – they have happened in the past (he means the ECB has lost money on its corporate bond-holdings in the past).


Trade policy

Two questions on trade. First, how do you model the worst case scenario? Second how confident are you Europe can come up with a unified trade policy?

Mr Draghi says trade policy is the preserve of the EU Commission, not individual countries. The first question is harder. I said news on trade “seemed to be slightly better”. But next time there could be a list of things that are worse. The situation changes depending on many things including mood.
Consider Brexit, and other events, Mr Draghi says. All this has increased the general uncertainty. It has affected confidence – and decreasing confidence affects business decisions.


Euro hits session low

The euro wilted across the board and hit the day’s lows against its major peers, losing 0.25 per cent of its value against the dollar during ECB President Mario Draghi’s press conference, reports our currencies correspondent Eva Szalay, after he said that the balance of risks is shifting to the downside.

Declines in the euro picked up pace once Mr Draghi changed some key words in his statement, moving away from the phrasing used at last month’s press conference that stated risks to the economy remain broadly balanced to a more negative outlook.


QE is a standard tool

Next question: is QE now a normal part of the toolbox?

The answer is yes, Mr Draghi says. Now it has been sanctioned by the recent European Court of Justice ruling, this is a very important ruling and now one can say that the court has sanctioned our conviction that the ECB is like other central banks as far as the array of tools that it can use.


Euro’s 20th birthday

Mr Draghi says he’ll be speaking about the euro’s 20th birthday on Saturday. The first ten years was the culmination of the “great moderation”. The second decade was constant crisis. But I think the euro has been a success. The question is whether everyone has enjoyed the benefits – the answer, clearly, is that they’ve haven’t. Some of this is due to national policies, but not all. The euro area needs “candid, close introspection” to inspire future action on completing monetary union.


Protests in France

Final question: it’s about the protests in France. As central bankers, how can you contribute to giving those people more answers?

Mr Draghi expresses sympathy for those affected by this week’s attack in Strasbourg. We are not going to comment on what has happened in France, he says. We condemn violence but the right to protest is part of our democracies. I’m confident the French government will address this problem in the best way.


Main takeaways from the press confidence

1) The key phrase is “continuing confidence with increasing caution”. The ECB has trimmed its growth forecasts, and now thinks the risks to the economic outlook are tilted to the downside. But Mr Draghi put a lot of emphasis on the healthy state of wage growth, which he expects to feed inflation.

2) The ECB has left its forward guidance unchanged – even though it has again trimmed its inflation forecasts for 2019 and 2020 and financial markets expect the first rate hike to come later. Mr Draghi refused to be drawn on this gap between the ECB’s guidance and market expectations, saying that markets “understand the ECB’s reaction function”.

3) As for the tools the ECB could deploy in a future downturn, Mr Draghi was clear that QE is still in the toolbox. The governing council mentioned the possibility of future LTROs, he said, but there was no substantive discussion.


More detail on repurchasing

The ECB has just published some technical information on how it will go about reinvesting the proceeds of maturing bonds that it has bought through the QE programme, from the start of January onwards.

The relative sizes of each part of the asset purchase programme – public sector bond holdings, corporate bond holdings, covered bonds and asset-backed securities – will remain the same.

The reinvestment of maturing government bond proceeds will “continue to be guided, on a stock basis, by the respective national central banks’ subscription to the ECB capital key, as amended over time”, the ECB said. That means it will shift to using the new capital key to distribute its purchases across Eurozone member countries.

Therefore “as a rule” redemptions will be reinvested in the same jurisdiction, but the ECB’s portfolio will be “adjusted” over time to bring it into line with the new capital key. However that will be done gradually and “calibrated as appropriate to safeguard orderly market conditions”. That’s a reference to the Italian market, which will see lower levels of ECB reinvestments because of the decline in the size of its economy relative to the rest of the Eurozone over the past five years.

Reinvestments will be “distributed over the year” in order to “allow for a regular and balanced market presence”, the ECB said – so that means bonds won’t necessarily be reinvested as soon as they mature. (Reinvestments currently take place over a three-month time horizon).


Big unanswered questions

Paul Diggle, senior economist at Aberdeen Standard Investments, said that today’s statement and press conference “leave big unanswered questions about how the ECB will respond if the data continues to soften”.

“Mr Draghi knows that he can only ever win support from the governing council to act once the economic situation has got pretty dire,” he said. “We’re some way off that and Mr Draghi’s influence will gradually drain as his departure from the ECB approaches in October next year.”

The only real option Mr Draghi has left, if the economy worsens, is to “tweak the bank’s language about future policy”, which Mr Diggle described as “thin gruel” in policy terms.*


Tepid growth

Here is commentary from Michael Metcalfe, global head of macro strategy at State Street.

“Growth, as reflected in the ECB’s own forecasts, remains tepid. This means that the monetary tightening cycle will be glacial and pressures of fiscal policy will only grow in the coming year. This in turn will keep the market focused on the details of ECB’s reinvestment policy for what little official support will remain for sovereign bond markets going forward.”


OK we’re going to wrap things up here now, thanks for joining us on what has been a historic – although widely expected – day for eurozone monetary policy, as Mario Draghi brought the ECB’s bond-buying programme to a close.