ECB left it policy rates and the asset purchase program unchanged. The members remained confident over the economic outlook but acknowledges some risks, including protectionism and financial market volatility, that could derail the recovery path. As we had anticipated, ECB has kept the details of the reinvestment schedule after QE ends until December.

The main refi rate stays at 0% and the deposit rate at -0.4%. The rationale for the latter is to encourage banks to increase lending, hence stimulate the economy. It reaffirmed that the policy rates would stay on hold until at least the summer of 2019, to ensure that inflation returns sustainably to the target of below, but close to, 2%. Meanwhile, ECB maintains the target of buying 15B euro of assets per month from October to December, reiterating the anticipation that the entire program would finish by until the end of the year.

President Mario Draghi appeared confident over the inflation, expecting underlying inflation ”to pick up towards the end of the year and to increase further over the medium term”. He added that “the underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding down of our net asset purchases”.

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While reiterating the risk to the growth outlook remains “finely balanced”, Draghi identified that protectionism, emerging market vulnerabilities and financial market volatility as important risks to Eurozone’s recovery. While Trump has made a deal with Canada and Mexico to replace NAFTA, formal renegotiation of trade deal between the EU and the US is yet to begin. Trump has been threatening to impose tariff on EU exports, such as automobile.

As we suggested at the preview, Italy is under the spotlight. Draghi refrained from answer many questions related to the country’s debt problem. For instance, one question was about whether he think the spread between Italian and German bonds would widen to as much as 400 bps and whether that would cause impairments to Italian banks’ balance sheets. Draghi noted that he does not have a crystal ball, whilst admitting that Italy’s banking system might be at risk as it holds huge amounts of the country’s sovereign debts

Regarding Trump’s criticism of the Fed, Draghi urged respect to the independence of a central bank. As he noted, “central bank independence is a precious thing. It’s precious because it’s essential for the credibility of the central banks, and credibility is essential for effectiveness”. Indeed, Trump is a demagogic leader. While he understands that calling the Fed “crazy” would not change its stance of gradual rate hike, Trump intentionally did to arouse the attention of his supporters, in particular his Republican party is lagging behind in the mid-term elections according to polls.

The December meeting would be a busy one. ECB would announce a formal end of QE, reveal details of the reinvestment plan and release latest staff economic projections.

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