ECB’s decisions in June came in largely in line with our expectations, although it might have contained surprises for other market participants. The central bank decides to reduce the size of its QE program to 15B euro/ month, from the current 30B euro/ month, from October. The entire purchase would end in December, as we had forecast. The Council also affirmed that interest rates would stay at the current level at least until “summer of September”. In response to the moderation in growth and uncertainty over US’ trade policy, the staff revised lower GDP growth estimate for this year. Euro tumbled on profit-taking as the market had priced in a QE tapering after Peter Praet speech last week. Another reason for the selloff was the change in the forward guidance of the interest rate path. Although it is a surprise to many market participants, we had suggested that the ECB would signal for how long it would keep the rates at the current levels.
The central bank has announced important changes to its QE program. It would maintain the current monthly pace of 30B euro until the end of September 2018, and then reduce the purchases to 15B euro until the end of December 2018 and that net purchases will then end. After the program is ended, ECB would still maintain the size of the balance sheet by reinvesting the principal payments from maturing securities purchased.
On the policy rate, ECB in June left the main refi rate, the marginal lending rate and the deposit rate at 0%, 0.25% and -0.40% respectively. The Council also announced that it would keep interest rates at “present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path”. Previously, ECB had been reiterating to keep the interest rates “at their present levels for an extended period of time, and well past the horizon of the net asset purchases”. The amendment in the above forward guidance has not only affirmed the market that any potential rate hike would come well after the end of the QE program, but also has given a concrete idea of the appropriate timing of expecting the first rate hike.
On economic projections, the region’s GDP growth is expected to reach +2.1% in 2018, down from March projection of +2.4%, before easing to +1.9% in 2019 and then to +1.7% in 2020. Reflecting the increase in oil price, inflation is expected to reach +1.7% this year and through 2020, compared with March projection of +1.4% for this year and in 2019. Policymakers revised slightly higher the forecast for core inflation by both 2019 and 2020 to +1.6% and +1.9%, respectively.