Strategy & economics

The ECB skilfully weakened its easing bias without upsetting the markets

The ECB removed the wording on the need to increase its Asset Purchase Programme, but was reluctant to provide more clarity on its end date.

12/03/2018

Janet Mui

Janet Mui

Global Economist

The European Central Bank (ECB) gradually tweaked its forward guidance to a less dovish stance at its March meeting, dropping from its policy statement the phrase: "if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase the asset purchase programme (APP) in terms of size and/or duration".

The removal of this explicit phrase is widely viewed by some as the removal of its easing bias, which is reasonable given the strength in economic momentum. Note that the ECB only removed the wording on the need to increase APP, but is reluctant to provide more clarity on the end date of quantitative easing (QE) at this point. This subtle tweak in language suggests the ECB is being cautious in terms of communication on monetary policy normalisation. The euro and bond yields initially jumped when the statement was released, but fell back after Mr. Draghi downplayed the significance of the language change and highlighted the soft inflation outlook at the press conference. So, the ECB skilfully weakened its easing bias without upsetting the markets last week.

Given the strength in the euro (from the weak US dollar), the hung parliament situation in Italy and heightened risk of trade protectionism, the ECB likely wants to avoid projecting an overly hawkish stance at the moment. However, we think the ECB remains on course to normalise policy and will deliver a more decisive tone in June. We expect the ECB to conduct monthly asset purchases of €30bn until September 2018 and then wind down the QE programme, with the first rate hike around mid-2019. Overall, the monetary policy stance is likely to remain accommodative in the medium-term, as the ECB is likely to continue reinvesting maturing securities, and we expect interest rates to remain very low in the foreseeable future.

For macroeconomic forecasts, the ECB made minimal change to its growth and inflation forecasts. Positively, 2018 GDP growth was revised up by +0.1% to +2.4% (vs. projections in December 2017) with the ECB statement highlighting the broad-based and sustained nature of growth in the region. Looking at inflation, the 2019 headline Harmonised Index of Consumer Prices (HICP) was revised down by -0.1% to +1.4%, with an upward revision to euro exchange rate assumptions. 

Author

Janet Mui

Janet Mui

Global Economist

Janet is an Economist working in the Investment Strategy Team and a CFA charterholder. She joined in 2011 and previously worked in Citi Hong Kong as an analyst in Global Portfolio Management and subsequently as a relationship manager to multi-national clients. Janet graduated with a BSc in Economics from the London School of Economics (first class honours), holds an MBA in Finance from the University of Cambridge and obtained a Postgraduate Certificate in Econometrics from Birkbeck College, University of London.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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