President Mario Draghi’s last ECB meeting came in without surprise. He sent a cautiously dovish message about Eurozone’s economy and reiterated the importance of the stimulus package announced last month. The new leadership will likely maintain the existing policy stance unless there are dramatic changes in the domestic and global economic environment. At the meeting, ECB left the deposit rate unchanged at -0.5% and affirmed that new QE program will take effect on November 1.We expect further reduction in deposit rate will come early next year, possibly together with extension of QE.

Eurozone’s economy remained fragile. As suggested in the accompanying statement, data flow during the inter-meeting period confirmed “a protracted weakness” in the region’s growth outlook, as we as “persistence of prominent downside risks and muted inflation pressures”. It also acknowledged that the problem of sluggish wage growth persisted. At the press conference, Draghi also cited recent PMI data as a signal of economic weakness. Besides noting that manufacturing PMI declined to the lowest level since 2012, he raised concern that weakness in manufacturing sector is spreading to the services sector. The contagion is sign of weakness in the macroeconomic environment. Draghi suggested that political risks have reduced in the near-term amides lower chance of a hard Brexit. Yet, he still advised caution to political uncertainty in the medium term.

Draghi downplayed the concern about a divided committee as portrayed in the September meeting minutes. He affirmed that all members agreed that further easing was warranted and there was “a clear majority” of members supporting the package announced in September. He added that the plans to resume QE, cut deposit rate and introduce the two-tier system were decided with large and clear majority. Concerning QE, Draghi affirmed that asset purchase will begin on November1 at a monthly pace of 20B euro.

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Leadership change will not make much difference to the monetary policy stance. We expect the monetary policy stance to stay dovish and further rate cut and QE extension will come early next year.

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