The central bank presented arrived with bad news – that the ECB will soon wind down its quantitative easing (QE) programme – but walked away with a good outcome – engineering a significant loosening in financial conditions: Bunds rallied, the Euro STOXX 50 equity index jumped and the single currency tumbled lower on the foreign exchanges versus the US dollar.
Policy and politics
The ECB’s policy announcements were a little more dovish than markets had expected: the end of QE was made conditional on the medium-term economic outlook (although we suspect that this condition will be easy to meet) and the guidance on future interest-rate rises was tweaked to signal that rates should remain on hold until at least the summer of 2019.
Moreover, the tone on the economy was more downbeat – “news are still good, but they’re not as good as they were a quarter ago” and “we may well have this soft patch being somewhat longer than it is in the (ECB) staff projections” – adding to the dovish feel of the meeting.
The path of rates, Draghi and his successor
However, it is worth noting that the staff forecasts show core inflation heading back up to the ECB target in 2020, and probably overshooting by the end of 2020. The wording on the rate guidance is also non-committal: the governing council continues to use the weakest form of guidance in its lexicon when talking about the path of rates.
Nonetheless, the market appears to have taken the guidance as a quasi-commitment, pushing back expectations for the first eurozone rate rise into late 2019 and beyond the ‘great discontinuity’: Draghi leaves the ECB at the end of October 2019 and the choice of his successor at the helm of the central bank could play an instrumental role in determining the path of rates beyond that point.
This race to succeed Draghi may also have had something to do with the fact that the policy decision was unanimous. If you are (governing council member) Dr Jens Weidmann, President of the Bundesbank, a three-month delay in raising rates for the first time this cycle may be a price worth paying to regain control over the ECB policy debate. And of course, loose financial conditions will make it easier to meet the weak conditionality on shutting down QE.