ECB Enhances Forward Guidance, Pushes Rate Hike Out At Least Through First Half Of 2020

The June ECB meeting needs no introduction, but just in case it did, we previewed it twice, first on Sunday evening and then again on Tuesday.

The focus will obviously be on the new round of TLTROs. Lurking in the background is the increasingly fraught situation in Italy, where Matteo Salvini is about one errant Di Maio comment away from pulling the plug on everything and declaring himself king. On Wednesday, the EU initiated disciplinary action against Rome and League has sounded a defiant tone.

Read more: EU Officially Comes For Italy

Despite some green shoots having emerged of late, and although the EU elections did not produce the kind of populist wave some feared, the German economy is still teetering, as is the grand coalition — Nahles resigned on Sunday and Merkel has soured on AKK, which leaves both SPD and CDU in flux. Bund yields pushed to record lows last week.

While GDP in Q1 for the euro-area was decent, inflation data for May disappointed, underscoring the notion that the central bank cannot move further down the road to normalization anytime soon.

The threat of auto tariffs from Trump continues to cast a pall over the outlook for Europe and the Mexico escalation only adds to reservations in Brussels about the relative wisdom of negotiating with the US.

“We do expect communication [from the ECB] on several fronts”, Goldman wrote last week. Here’s more from their preview

We expect the Governing Council to acknowledge downside risks to the growth outlook as well as risks posed by weaker inflation expectations. We also expect the Governing council to announce key details of an easing package as an insurance against these downside risks, with generous TLTRO-III pricing and a further three-month extension of the date-based guidance to March 2020, although more forceful action is possible. Given the continued weakness in actual and expected inflation, we now think that lift-off will be delayed and move our forecast for the first hike by six months to end-2020.

That last bit is key. ECB forward guidance is now undergoing perpetual “enhancement”, where that means the first hike is getting pushed further and further out. For their part, Barclays expects “a decisively dovish message [from] Draghi in the press conference, in the form of concrete measures (more generous terms on TLTRO III) and verbal interventions (keeping rate cuts/tiering prospects alive).”

And with that, the statement is out and the ECB has indeed enhanced the forward guidance. The first hike has been pushed out “at least through” H1 of next year, which appears, on a first read anyway, to be dovish relative to market expectations.

Operational details around the TLTROs are out as well. They don’t look overtly dovish at first blush. Credit Agricole calls this “a botched compromise between the Governing Council hawks and doves, but nothing dramatic.”

As ever, all eyes will be on Draghi’s presser.

Full statement

At today’s meeting, which was held in Vilnius, the Governing Council of the European Central Bank (ECB) took the following monetary policy decisions:

(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020, 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.

(2) The Governing Council intends 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 it starts 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.

(3) Regarding the modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III), the Governing Council decided that the interest rate in each operation will be set at a level that is 10 basis points above the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III will be lower and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation plus 10 basis points.

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