ECB Maintains Course, Check Back in June

The ECB’s initial statement that accompanied the announcement of no change in rates or the pace of asset purchases was as expected.  The ECB will continue to buy 30 bln euros a month until the end of September (“or beyond if necessary”).  It kept the conditionality of ending its purchases intact: “until the Governing Council sees a sustained adjustment in the path of inflation” consistent with its target of near but below 2%.   

The other element of forward-guidance related to interest rates.  As the ECB has stated before, rates will stay at present levels for an extended period of time and “well past” the end of the net asset purchases.  We suspect this means around six months or so after the purchases stop, which would be around mid-2019 and still likely before Draghi’s term expires in October 2019.  

Draghi acknowledged that the economy has moderated but remains broad and solid and sufficient to keep the ECB confident that inflation will converge toward its target.  Draghi saw headline CPI hovering around 1.5% for the remainder of the year.   It is not there yet, so continued ample monetary accommodation is still needed.  Draghi did not seem to put much stock in the economic moderation, noting that is may be the result of a pullback from elevated levels in Q4 and transitory factors (e.g., weather, particularly bad flu season, labor strikes, etc.).

The ECB reiterated that the risks to growth are balanced.  The risks that Draghi specifically cited were on the downside.  This is may be one of the few clouds in the silver lining that Draghi depicted.  That said, Draghi reiterated his call for structural reforms, including rebuilding the fiscal cushion and completing the banking and capital market union.  Most the risks that Draghi focused on were from the global economy, including protectionism.  Draghi summed up his assessment as cautiousness tempered by confidence that the inflation target will be achieved.  

The euro spiked down to almost $1.2146, briefly falling through the March 1 low.  It quickly snapped back to trade at new session highs a little above $1.2200.  We suggest potential toward $1.2240-$1.2260. 


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