Draghi talked but said little new. As the leaks suggested, the
calibration of the asset purchases will be
announced next month. However, Draghi left no doubt that
substantial accommodation is still judged necessary, indicating that the bond
buying program will be extended into next year, though the amount remains
unspecified.
The ECB President was clear that despite the solid and broad based
growth, price pressures remain subdued and are not yet on a self-sustaining and
convincing uptrend. This also
reinforces ideas that the ECB’s balance sheet is going to continue
expanding.
The ECB staff forecasts were in
line with the leaks. The growth forecasts were tweaked slightly
higher and inflation a tad lower. Growth this year was revised to 2.2%
from 1.9%. This reflects the
stronger than expected performance in H1. The GDP forecast for 2018 and
2019 was left unchanged at 1.6% and 1.7%
respectively. The CPI forecasts were revised lower, mostly due to
exchange rate appreciation. For this year, headline inflation is expected
to be 1.5%, down from 1.6% in June. Next year’s forecast was trimmed to 1.2% from 1.3%. Inflation
in 2019 is expected to be at 1.5% rather than 1.6%.
On the currency, Draghi noted up front that the volatility was a source
of uncertainty. He did acknowledge
that the euro’s appreciation may dampen exports. He reiterated the mantra
that the ECB does not target the currency but that the exchange rate is
important for growth and inflation expectations. The discussion, Draghi
said, was over how much the euro appreciation is due to exogenous factors and
how much is a function of EMU performance.
The length and size of the asset purchases were discussed. Draghi characterized the discussion as
were preliminary and that changing the country and security limit was not
discussed. Nor was the sequence, which is to say that rates will remain
low until well after the asset purchases cease.
The euro rallied to approach but not yet taken out the high make in late
August near $1.2070. Our next technical objective is near $1.2165,
the 50% retracement of the euro’s decline that began in mid-2014.