The ECB kept all policy rates unchanged and maintained the monthly QE purchases of EUR80bn . The ECB "continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases". The QE programme is still "intended to run until the end of March 2017, or beyond, if necessary, and in any case until [the bank] sees a sustained adjustment in the path of inflation consistent with its inflation aim".
Overall, the comments from President Draghi were slightly more hawkish than expected . According to Draghi, the ECB's assessment following the UK referendum on EU membership "is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience". Added to this, Draghi downplayed the importance of the very low 5y5y inflation expectations as he said it could be difficult to access the move in market based inflation expectations following the Brexit vote.
That said, the door for more easing is not closed and Draghi particularly stressed the ECB's readiness, willingness and ability to act . In our view, more easing is likely to follow at the next meeting in September as the ECB sees itself in a better position to access the impact of the Brexit vote when they have updated projections. Currently the ECB sees the risks to the growth outlook as tilted to the downside. We expect the ECB to ease monetary policy at the next meeting as we foresee a weakening in economic data . Our call is that the QE programme will be boosted temporarily to EUR100bn for the rest of 2016 and that the programme will be extended until September 2017. We do not forecast any further rates cuts from the ECB.
During the Q&A session Draghi repeated that the ECB had not looked at specific easing measures . A lot of questions focused on scarcity of bonds and whether the ECB considered going from buying bonds according to the capital key to e.g. following a debt distribution, but Draghi continued to reject that specific measures had been discussed.
Market reaction
Bund yields have edged slightly higher after the ECB press briefing underlining that Draghi was seen as slightly less dovish than expected . The lack of discussion of a change of the 'capital key' towards a 'debt key' weighed slightly on Italian bonds. A change in the 'key' would in our view, everything being equal, result in higher purchases of Italian bonds. Despite the announcement today, the money market is still pricing a high probability of a new rate cut from the ECB, which we still think is overly optimistic.
EUR/USD barely reacted in line with expectations as Draghi signalled a wait-and-see attitude but left the door open for more easing . We maintain our call that EUR/USD will fall modestly near-term (3M forecast 1.07). Further ECB easing and US growth outperformance should drive EUR/USD lower in the autumn. Medium term, we maintain our long-held call for a higher EUR/USD towards 1.14 on 12M on valuation and current account differential.
To read the entire report Please click on the pdf File Below