More questions than answers
A few thoughts on the back of the ECB meeting (further to the review ), which we believe raised more questions than it answered. Overall, the press conference shows it will be a slow and gradual normalisation. Mario Draghi even reiterated his confidence, prudence, persistence wording from last year:
The statement carried only few changes and overall it was a dovish introductory statement.
The first change is slightly more upbeat growth wording and second, the mentioning of the exchange rate as a source of uncertainty in the introductory statement (as in September 2017). That mention should have been a dovish signal in itself.
It has been a while since Draghi came out with many words, with so little content.
Draghi dismissed outright the notion of any discord between the December minutes and the press conference. We do not agree. We believe the GC to be split on the purchase programme and not as much on the policy rate discussion.
Late yesterday, reports suggested that some officials are said to prefer June for the next shift while others favour a series of small tweaks in language starting in March (see point above).
Could the market reaction yesterday indicate that the ECB might fall behind the curve?
ECB board member Benoit Coeuré is due to speak at 11:00 CET today and is expected to discuss monetary policy after yesterday's meeting.
Three items that we find particularly noteworthy
Draghi has put a lot on emphasis recently on the stock of purchases and not the flows. He did the same yesterday. As redemptions/reinvestments make the picture muddier (as they can be spread out over a period of 'three months'), a potential catch-up of stocks that are below the capital key such as Ireland is possible.
Draghi mentioned that there are 'few chances' of a rate hike this year when he was asked if 'well past' (i.e. keeping interest rates low beyond the end of QE) could be in line with a rate hike this year. We view this to be very data dependent but we are puzzled why he would even say this. The obvious question is that the 'ECB never pre-commits' but forward guidance is exactly that.
On the 'sudden stop' (to stimulus), he clarified that the comment from October 2017 was his view and that a discussion had not taken place. We already know that Ardo Hansson, Governor of the Bank of Estonia, has indicated that some GC members could see a sudden stop. Draghi emphasised the difference between a sudden stop, extension of the programme and gradual tapering.
To read the entire report Please click on the pdf File Below: