ECB: Foundations laid for changes in the guidance - Rabobank

Despite the unchanged forward guidance, Mr. Draghi did lay further foundations for any changes in the guidance, or –looking somewhat further ahead– the net asset purchases, according to analysts at Rabobank.

Key Quotes

“The ECB President outlined that as the economic expansion progresses, the net asset purchases will unavoidably become a less important part of the ECB’s monetary policy. He reiterated that the policy stance will remain accommodative even as the Governing Council is getting increasingly confident that inflation converges to its target, with this accommodative stance mainly driven by the size of the ECB’s balance sheet, reinvestments, and the rates guidance – rather than the net asset purchases that currently enjoy most of the market’s attention.”

“This view is widely shared amongst the Council members. After a range of comments with various opinions coming from different members of the Governing Council in the past month, Mr. Draghi reassured his audience that there are no deep, existential differences of opinion. Instead, the Governing Council was said to be mostly divided about the timing of certain changes in policy, rather than the steps or the order in which they have to be taken.” 

“In that respect, Mr. Draghi did note that the money market curve had shifted up quite a bit. In part, Mr. Draghi attributed this to improving economic conditions, but he also suggested that the market may have priced in a bit too much with respect to the timing of a first rate hike. President Draghi emphasised “well past” when he mentioned the intended sequencing that rates will not move until well past the end of net asset purchases, and even explicitly stated that “based on today’s data and todays projection, I see very few chances at all that rates could be raised this year.”

“This rare event of such strong and specific intervention was broadly in line with our expectations. However, the attempt at intervention has only been somewhat effective. Going by the Eonia forward curve, rates in the 9-12 months area are now definitely lower than they were mid-January, but they remain elevated compared to their levels around the time of the December meeting; we would thus argue that this part of the curve may still have some room to run.”