I don’t want to suggest the ECB story isn’t “important”, because that wouldn’t be accurate – at all.
In fact, the juxtaposition between the incoming data (which has obviously been less than inspiring and continued right up through Thursday’s Draghi presser) and the decision to proceed with calling an end to APP (albeit with enhanced forward guidance on reinvestments as communicated last month and reiterated in the new statement), is stark and clearly suggests the central bank has missed its window.
Here’s a chart of eurozone GDP with the ECB’s balance sheet and what you want to note is that the balance sheet was always growing during previous soft patches, whereas now, net asset purchases have ceased, even as the data falls off a cliff (that latter characterization is a bit hyperbolic, but you get the idea).
(Bloomberg)
So, yes, the discussion is important. And yes, it’s clear that the ECB probably should have moved more aggressively to normalize when they had the economic cover. And by extension, yes, the risk now is that they end up not being able to hike at all because by the time they get around to it, the eurozone will be on the brink of a downturn.
Read more on the end of ECB QE
ECB Ends QE And, Critically, Enhances Forward Guidance Around Reinvestments
But this discussion has been going on for months and we all know the narrative by now. Trade frictions and Brexit complicate the picture still further, something Draghi emphasized again on Thursday. They (the ECB) have done what they can do in terms of forward guidance (last summer’s implementation of state-and-date-dependent rates guidance and, from December, date-dependent forward guidance on reinvestments).
That’s all we’re going to get right now and in keeping with that, the January statement and presser delivered what was expected: an acknowledgement that the economic outlook has darkened further, a reiteration of the risks and the obligatory nod to “confidence” in the inflation outlook despite a lack of convincing evidence to support that confidence.
The market was hoping for something definitive on TLTROs and that wasn’t forthcoming, although Draghi said it’s been discussed. Here’s a Cliffs Notes version (the full introductory statement is copied below, but the TLTRO comments came during the first couple of minutes of the Q&A):
So, basically, they’re going to sit back and see what happens and go from there. As should be abundantly clear to anyone who has ever watched (let alone attended) one of Draghi’s pressers, he’s not prone to getting rattled or otherwise saying something unexpected unless it’s by design (the one exception is Josephine Witt showing up – apparently being glitter bombed by cute girls is Draghi’s Achilles’ heel when it comes to getting noticeably perturbed).
Anyway, the point is, the story hasn’t really changed from last month. The data is getting worse (Citi eco surprise index now back to the lows seen after the H1 2018 downturn scare) just as APP ends, that’s potentially dangerous and so are trade wars and so is Brexit, assuming it ever actually happens.
(Bloomberg)
The euro generally held onto losses logged earlier in the session (following lackluster PMIs) as Draghi spoke and then bounced a bit. European equities were mixed.
If there’s anything amusing about all of this, it’s that 10-year yields in Italy are now back to multi-month lows and while there are obviously all manner of factors at play, there’s a (strong) argument to be made that the worse things get for the rest of the eurozone without a full-on recession, the better for Italy as it means the ECB will be predisposed to dovishness.
(Bloomberg)
Full Draghi introductory remarksÂ
INTRODUCTORY STATEMENT
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, we intend to 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 to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
The incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors. The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence in the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This will be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. Incoming data have continued to be weaker than expected as a result of a slowdown in external demand compounded by some country and sector-specific factors. While the impact of some of these factors is expected to fade, the near-term growth momentum is likely to be weaker than previously anticipated. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, lower energy prices, and the ongoing — albeit somewhat slower — expansion in global activity.
The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
Euro area annual HICP inflation declined to 1.6% in December 2018, from 1.9% in November, reflecting mainly lower energy price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline further over the coming months. Measures of underlying inflation remain generally muted, but labour cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
Turning to the monetary analysis, broad money (M3) growth moderated to 3.7% in November 2018, after 3.9% in October. M3 growth continues to be backed by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The annual growth rate of loans to non-financial corporations stood at 4.0% in November 2018, after 3.9% in October, while the annual growth rate of loans to households remained broadly unchanged at 3.3%. The euro area bank lending survey for the fourth quarter of 2018 suggests that overall bank lending conditions remained favourable, following an extended period of net easing, and demand for bank credit continued to rise, thereby underpinning loan growth.
The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing — in particular for small and medium-sized enterprises — and credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the Governing Council reiterates the need for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions. Likewise, the transparent and consistent implementation of the EU’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
