ECB: Keep On Keepin’ On – TDS

Research Team at TDS, notes that as universally expected, the ECB left its policy on hold yesterday, as it continues to focus on implementation of its corporate bond-buying and TLTRO II programs.

Key Quotes

“The ECB left its forecasts relatively unchanged, with slight upgrades to the 2016 growth and inflation forecasts, but largely unchanged forecasts in 2017 and 2018. President Draghi acknowledged that while risks were still tilted to the downside, they had improved somewhat recently.

The ECB remains very much in implementation mode. Decision and press conference stressed that much of the ECB’s March policy announcements had yet to be implemented, and will continue to provide stimulus to the economy going forward.

Highlights of decision include:

·         It was announced that the Corporate Sector Purchase Program (CSPP) will start on 8 June and the announcement of TLTRO II will be on 22 June (the deadline for counterparty bids is 23 June).

·         A decision on Greek bond buying must still be made by the full Governing Council once creditors have fully approved the deal between the ESM and the IMF.

·         The ECB favours the UK remaining in the European Union in the 23 June referendum, but is ready for all contingencies.

Minor Revisions to the Forecast

The ECB left its macroeconomic forecast largely unchanged. Growth was revised up slightly to 1.6% in 2016, with 1.7% expected in each of 2017 and 2018 (2018 was 1.8%). Inflation was barely touched, with an increase of just 0.1pp in 2016 to 0.2%, with 1.3% and 1.6% expected in 2017 and 2018, respectively. The unemployment rate was also revised down, reflecting the steady improvements in the data seen in recent months, and is now expected to be below 10% in 2017 & 2018.

The relatively muted projection revisions send two messages:

1) On the growth front, the ECB’s policy is working, and will help boost growth this year. This can be seen (for example), by bank lending statistics, which have shown significant improvement since QE started (see chart) and 16Q1’s GDP.

2) There is still limited evidence of pressure on wages and prices (outside of Germany), leaving the Governing Council hesitant to revise up its inflation forecast until it sees sustained higher prices.”