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Draghi sticks to the script, but some crumbs of hope for the hawks

This afternoon the European Central Bank kept all its key interest rates unchanged. In his statement President Draghi reaffirmed the ECB’s forward guidance, saying that interest rates will stay at present or lower levels for an extended period and well past the end of its Quantitative Easing program. On the inflation outlook he again reiterated his previous comment that there was no convincing upward trend in underlying inflation. 

However for the first time in a long time there was a greater sense of positivity that concerns around worst case scenarios on growth and inflation were easing. 

  • This could be seen firstly in upgrades to its staff macroeconomic forecasts. GDP growth forecasts were nudged higher to 1.8% and 1.7% respectively in 2017 and 2018 (compared with 1.7% and 1.6% in December). In addition inflation forecasts were upgraded to 1.7% and 1.6% in 2017 and 2018 (compared to 1.3% and 1.5% in December). However its 2019 inflation remained unchanged at 1.7%, still below the 2% ECB threshold. 
  • Draghi also acknowledged during the press conference that, although risks were still tilted to the downside, the balance of risks to the Euro zone had improved. During the Q&A he also commented that there had been no conversation around a new TLTRO, again another sign of the Governing Council’s growing comfort with the slowly improving outlook.
  • Interestingly he was asked during the press conference whether there was any circumstance in which the Governing Council would raise policy rates before the end of QE. Although he didn’t explicitly rule this out, he again stuck to the script by reverting back to his statement on forward guidance. 

On balance it still looks as though the key ECB interest rates will stay at current levels for some time yet i.e. through the rest of this year and most likely next year. The slightly better news opens up the possibility of a further taper announcement in the over the summer though. 

Today’s announcement and comments are marginally positive for equities and the euro in our view and keep the pressure on government bonds. At the time of writing longer dated bond yields in the Euro zone have ticked a little higher while the euro and European equities have nudged up.  

Tom McCabe, Global Investment Strategist – 9th March 2017