14 June 2018
The Central Bank will reduce its monthly purchases from €30 billion per month to €15 billion from September until the end of the year, “subject to incoming data confirming the Governing Council’s medium-term inflation outlook”. New purchases will then stop, although the reinvestment of maturities will continue, keeping the ECB active in European fixed income markets for a long time still.
What really stood out today, however, was the statement that rates will not rise at least until the summer of 2019. It’s an important change of direction for the Governing Council, which has historically refrained from making any calendar commitment in its forward guidance.
During the press conference, ECB governor Mario Draghi went to great lengths to stress the risks and uncertainties that still lie ahead. While the ECB staff forecasts for inflation were revised higher, this was mainly due to oil prices. Meanwhile, growth is going through a soft patch which, according to Draghi, may last for some time.
Both the statement and the comments made during the press conference give the ECB ample “optionality” to change course and adapt policy in light of future data releases. However, it feels as if the ECB is still uncomfortable with the Eurozone economic outlook. Should data disappoint, the additional flexibility, both on QE and on rates, may come in handy.
The dovish forward guidance and the ECB’s pre-commitment on rates should lock market expectations for the next few months, anchoring the front end of European fixed income markets. Rates volatility is likely to subside, both on core and peripheral markets, in the absence of any new political flare or headline out of Italy in the near term. On a cross-market basis, German bunds should continue to outperform US treasuries in this environment as the divergence between the Fed and the ECB continues.
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