Posted October 20, 2016 Ashley Chadwick
The European Central Bank decided to stand pat today on all key rates and their bond buying. The refinancing rate and deposit rate remain at 0% and -0.4% respectively and bond buying remained at 80 billion a month until March.
This was widely expected with December seen as the likely time for any changes to be announced. That meant that all eyes and ears were on Mario Draghi during his press conference. His initial remarks were benign, but the markets woke up once the questions were asked.
The first market move came when Draghi stated that there was no discussion of extending the period of bond buying at this meeting. This saw a spike in the value of the Euro, rising back above $1.10, trading as high as $1.1039. This also caused a slide in the Bund, which dropped 60 ticks in a few minutes. The statement from Draghi certainly disappointed the market as many were expecting QE to be extended beyond the current March end date.
Draghi continued to channel his inner Arsene Wenger, but instead of not seeing the incident, he did not discuss things. The next item that was not discussed according to Draghi was the issue of tapering. Despite recent reports that the ECB would taper QE when they decided to end it, this was not raised at the meeting. Although, Draghi did go on to state that “an abrupt ending to bond purchases, I think, is unlikely.” Finally he went on to state that there was no discussion of lowering rates.
As the press conference continued it took on a more Dovish tone. By the end, sentiment had shifted and the signs are that come December, the ECB will extend bond buying past March 2017. This saw a reversal of the earlier moves, with the Euro tumbling against the dollar, falling to 4 month lows of $1.0916, it has not been below $1.09 since early March this year. Meanwhile the Bund rallied 90 points of its lows, to form new highs for the day.
Latest forecasts out of the ECB, show inflation steadily rising over the next couple of years, towards their target of being a little under 2%. Expecting it to be 1.6% in 2018, but this was calculated assuming ‘additional monetary policy measures’ from the ECB. So the December meeting is likely to bring fireworks, even if they do not match the Bazooka from earlier this year.