ECB: Changes in forward guidance - Danske Bank

Analysts from Danske Bank still expect that the European Central Bank to continue its QE program next year but to reduce its purchases to EUR40bn per month starting from January 2018.

Key Quotes: 

“The ECB kept policy rates and its QE programme unchanged but changed forward guidance on policy rates as it no longer expects these to go to ‘lower levels’. The rest of the forward guidance was left unchanged implying the ECB now expects policy rates “to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases”.

“Regarding the QE purchases, the ECB continued to have an easing bias as it communicated that it stands ready to increase QE in terms of size and/or duration. According to President Mario Draghi, the ECB changed its forward guidance on policy rates as the deflation risks have disappeared. However, this was despite the ECB lowering its inflation projection throughout its entire forecast horizon.”

“The inflation forecast for 2018 was lowered to 1.3% from 1.6% previously, while the forecast for 2019 was revised down by 0.1pp to 1.6% bringing it even further away from the 2% target. The reduced deflation risk should instead mainly reflect a stronger economic outlook.”

“The ECB now characterises the risks to the economic outlook as ‘broadly balanced’ while it revised its GDP growth projection upwards by 0.1pp in 2017, 2018 and 2019.”

“Crucially, Draghi said underlying inflation is expected to stay where it is. Related to this, the ECB revised its core inflation projection slightly lower for 2018 and 2019 and argued “measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilised resources are still weighing on domestic price and wage formation.” In our view, the ECB is still too optimistic in its core inflation projection and further downward revisions should warrant a continuation of the accommodative monetary policy.”

“We still expect the ECB to continue its QE programme next year but to reduce its purchases to EUR40bn per month starting from January 2018 and continuing for at least six months. In our view, it is still premature to discuss rate hikes from the ECB.”