Last week’s meeting of the ECB Governing Council concluded with the key interest rates unchanged at –0.4% for the deposit rate and 0% for the key refi rate.
This outcome was in line with market expectations. There was also no change to the plans for its asset purchase or quantitative easing (QE) programme.
The ECB had previously announced at its December meeting that it was reducing its rate of purchases from €80bn per month back to the original rate of €60bn per month, starting in April and extending the programme until end December 2017, or beyond, if necessary.
However, the tone and wording of the meeting statement indicate that the ECB is becoming more optimistic. Indeed, both the meeting statement and president Mario Draghi, in his press conference, said that the risks surrounding the eurozone growth outlook have become less pronounced.
This more upbeat assessment of the economic outlook was reflected in upward revisions, albeit modest, to the latest ECB staff economic projections.
The ECB now expects GDP to grow by 1.8% this year, up from 1.7% previously. Its 2018 forecast was also marginally upgraded to 1.7% from 1.6%, while its 2019 projection of 1.6% was left unchanged.
There were also upward revisions to the inflation outlook.
In the words of the ECB, the 2017 forecast was “revised significantly higher” to 1.7% from 1.3%, while the change to the 2018 figure was more modest, going from 1.5% to 1.6%.
The ECB is still concerned that underlying inflation pressures remain very low and subdued. Thus, it continues to emphasise that a substantial degree of monetary accommodation is still needed to ensure a sustained rise in the inflation rate.
In this regard, Mr Draghi stressed that wage growth, which remains muted, is a key linchpin of a self-sustained pick-up in the inflation rate. While headline inflation in the eurozone has picked up to 2%, the CPI rate excluding energy, has remained stuck at around 1%. Recent days have seen a renewed decline in oil prices and the expectation is that inflation will start to fall back again later this spring.
Nonetheless, there was significant market reaction to the ECB meeting. In particular, markets were affected by newswire stories that the ECB had briefly discussed raising rates before ending its QE programme, although there apparently was not much support for this idea.
The euro has risen above 87 pence against sterling and climbed to around the $1.07 level against the dollar. Eurozone bond yields have moved higher also.
Futures contracts now see three-month eurozone rates turning positive at the start of 2019, a year earlier than previously envisaged. However, rates are still expected to be below 1% in five years’ time, so it is anticipated that the ECB will maintain a very low-interest environment well into the next decade.
So when might the ECB begin to move on rates? We are unlikely to see the ECB start to scale back its negative discount rate until QE has ended. QE is expected to remain in place in the eurozone until at least mid-2018. Thus, any move on rates by the ECB still seems some time off.
Oliver Mangan is chief economist AIB
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