The ECB council meeting on 19 January was keenly watched for indications as to how the eurozone central bank is going to cope with the potential challenges that relatively strong economic growth and rising inflation pose to the rationale for its asset purchase programme.
Would the central bank waver over its promise to maintain asset purchases at EUR 60 billion until the end of 2017? As we expected, the ECB held rates steady and made no changes to its stimulus programme. We had not reckoned with any changes as the new size of the current programme was only announced a month ago.
So, it will require something major for the ECB to change course. But we expect market chatter and speculation about a possible tapering of the ECB’s asset purchases to continue.
For the moment, President Draghi has asked for patience. The governing council decided no changes were required to current policy and the ECB is actually ready to look through what it considers to be the temporary effect of an energy-driven increase in inflation.
Exhibit 1: The ECB considers the recent rise in headline inflation to be principally due to higher energy prices and not necessarily indicative a major trend change – the graph shows changes in eurozone core and headline inflation between 2000 and 19/01/17
In now allowing itself to buy bonds with a yield below its deposit rate (currently -0.4%), the ECB has ensured that there are ample assets for it to buy. As Draghi spoke the euro fell against the US dollar. In our view this suggests markets took his remarks as dovish, but the effect was only temporary (see Exhibit 2 below).
In our opinion the ECB’s willingness to ignore rising inflation for now is important since it reduces the risk of a hawkish policy error.
Exhibit 2: The exchange rate of the euro verus the US dollar fell during President Draghi’s news conference on 19/01/17, but this was only temporary – the graph shows changes in the euro/US dollar exchange rate for the period between 01/06/16 and 24/01/17.
Source: Bloomberg, BNP Paribas Asset Management as of 24/01/17