Upbeat ECB to extend QE into 2018
Monthly purchases will be halved, but repurchases will continue for some time as the economy appears to have turned a corner.
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President of the European Central Bank (ECB), Mario Draghi, gave a positive assessment of the eurozone economic outlook in his latest press conference as he confirmed the decision to keep interest rates unchanged, and to extend the ECB’s quantitative easing (QE) programme to September 2018.
Purchases will continue to include government and agency bonds, private sector bonds (credit) and asset backed securities, but will be reduced from the current pace of purchases of €60 billion per month to €30 billion per month.
Moreover, the ECB remains committed to reinvesting the proceeds from maturing assets to maintain the stock of purchases for a considerable period of time.
Growth set to continue
Draghi stated that “the latest data and survey results point to unabated growth momentum in the second half of this year”. Risks to the growth outlook remain “broadly balanced”, though “…recent sentiment indicators could lead to further positive growth surprises.”
However, the outlook for inflation is more uncertain. The ECB forecasts inflation to fall to 1.2% in 2018, before rebounding to 1.5% in 2019. “Measures of underlying inflation have ticked up moderately since early 2017, but have yet to show more convincing signs of a sustained upward trend”. This supports the ECB’s view that stimulus should continue, but should be scaled back.
Rate rise expected in first half of 2019
Overall, the ECB’s outlook and policy announcements were largely as expected. Nevertheless, the euro was down slightly against other major currencies, helping to lift equity markets.
Meanwhile, government bond yields were a little lower (prices higher), suggesting markets had not fully anticipated the extent of the ECB’s intentions.
We expect the ECB to probably extend QE again at the end of next year to finally end the programme in December 2018, paving the way for a rise in interest rates in the first half of 2019.