The July ECB meeting was supposed to a placeholder of sorts – an opportunity to lay the groundwork for the delivery of an easing package in September.
Data out this week (disappointing PMIs on Wednesday and Thursday’s disastrous Ifo numbers in Germany) underscore the case for easing, as it appears the bloc’s largest economy may be headed for a technical recession.
Headed in, it was at least possible the ECB would pull the trigger and cut rates, but generally speaking, the more likely scenario was that the statement (and Draghi’s remarks) would be used to prepare the market for September.
The economic outlook hasn’t changed much since the June meeting. Draghi’s Sintra comments all but confirmed further accommodation is imminent. The assumption is that Christine Lagarde will carry on Draghi’s legacy. Both the Sintra remarks and the announcement of Lagarde as Draghi’s successor helped stabilize inflation expectations temporarily, but that’s not likely to last in the absence of a forceful follow-through.
(Goldman)
Remember, 18% of those polled by BofA in the latest installment of the bank’s rates and FX sentiment survey chose “nothing” when asked what could bolster inflation expectations across the pond.
Here, for reference, is a table that shows how the data and financial conditions have evolved over the course of the last several meetings:
(Goldman)
Core and semi-core yields pushed to new all-time lows on Wednesday and Thursday amid lackluster data, as easing bets became more deeply entrenched. The ECB is pot-committed, the only question is what policy mix they’ll deploy and how it will be telegraphed.
Although the rate cut did not come Thursday, the statement contains significant new language including a tweak to the forward guidance on rates (which will remain where they are or move lower at least through the first half of 2020) and references to the imminent rollout of more accommodation.
After reiterating that inflation expectations continue to undershoot and promising that the Governing Council will “adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”, the statement notes that policymakers are now taking a look at the options, “including ways to reinforce forward guidance on rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases”.
So, there it is. An explicit reference to tiering, a nod to more forward guidance enhancements and, of course, a nod to a restart of QE.
Full statement
At today’s meeting the Governing Council of the European Central Bank (ECB) decided that 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 expects the key ECB interest rates to remain at their present or lower 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 its aim over the medium term.
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.
The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.
In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.
