The ECB meeting evolved as we had expected: more dovish, downgraded assessment on economy, leaving unchanged the forward guidance on interest rates. the central bank has acknowledged that the uncertainties in the global economy have intensified and can persist for quite an extended time. No change was made in the monetary policy, leaving the main refi rate, the marginal lending rate and the deposit rate unchanged at 0.00%, 0.25% and -0.40% respectively.

Forward Guidance Unchanged

Dubbing what’s mentioned in the December statement, ECB indicated that it would “continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary”. On interest rates, it also reiterated that there would no rate hike “at least through the summer 2019”. While giving no definite timing for the end of reinvestment, i.e., the beginning of balance sheet reduction, we anticipate it would continue at least through end-2020.

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Economic Assessment

ECB noted that “the risks surrounding the Euro area growth outlook have moved to the downside”. This is the first time since April 2017 that the central bank admitted that risks are to the downside. Over the past 21 months, ECB had been describing risks as “broadly balanced”, while suggesting the balance is “moving to the downside”. The uncertainties ECB has identified are “geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility”. These have been unchanged from previous meetings.

No Announcement on New Liquidity Operations

While noting that TLTROs had been highly useful in the past, the ECB has not announced any related operations at the meeting. Yet, President Mario Draghi added that “several members mentioned the issue”. We retain the view that ECB wound launch a new round of TLTROs by 1Q19.

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