The ECB kept all policy rates unchanged at today's meeting, which was in line with expectations. In the introductory statement, Mario Draghi repeated that the QE purchases are intended to run until the end of March 2017, or "beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation" while "policy rates will stay at present or lower levels for an extended period of time and well past the horizon of the net asset purchases" .
Moreover, Draghi argued that additional monetary policy easing from measures already announced will follow when implemented. Related to this, the ECB announced that the corporate sector purchases will start on 8 June, and the first operation in the TLTRO-II operations will start on 22 June.
The ECB updated its GDP growth and inflation projections, but the revisions were small. The ECB revised its headline inflation forecast higher only in 2016 (to 0.2% from 0.1%) and Draghi said "inflation rates are likely to remain very low or negative in the next few months before picking up in the second half of 2016" . The unchanged inflation forecast in 2017-18 (at 1.3% and 1.6%, respectively) implies, in our view, that the ECB could revise it higher again in September mainly due to a higher oil price.
The ECB lowered its core inflation forecast, but is in our view still too optimistic on this. We believe the wage pressure will stay modest for some time due to slack in the labour market, while the stronger effective euro will also be a headwind to core inflation.
We still believe that the ECB will have to extend its QE purchases beyond March 2017 as the ECB in our view will not see inflation at a sustainable path towards 2%. We do look for a considerable rise in inflation starting from June this year, but the main driver is the contribution from energy prices and no matter whether the oil price follows our forecast or performs in line with the forward market, the support will fade in Q2 17. (We believe the ECB will refrain from cutting policy rates again.)
There was no market impact from today's ECB press conference. Even when Draghi was confronted with the question of the potential ECB response to a 'Brexit' he refrained from giving any bold signals and stated that 'the ECB is ready for all contingencies'. The periphery was trading weak on Brexit concerns prior to the press conference and the market didn't move much during the press conference.
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