As anticipated, the ECB held its policy rates constant with the deposit rate remaining at -0.4%and monthly government bond purchases of €60bn euro, despite a slightly brighter outlook on GDP growth, which is expected to rise to 2.2% in 2017, Mario Draghi announced during yesterday’s ECB monetary policy meeting.
As Draghi pledged that a decision on policy changes will be announced next month, Jaisal Pastakia, Investment Manager at Heartwood Investment Management comments: “In many ways, the ECB can afford to leave investors ‘hanging’, a situation that would not have been palatable a couple of years ago and an indication of the significant improvement in the fundamental backdrop. Policymakers’ confidence in the growth picture is rising based on the higher revision to this year’s GDP forecast to 2.2% year-on-year, which would represent the fastest pace since 2007.”
The persistent euro strength continued to influence decision making, as Draghi lowered inflation forecasts to 1.5% this year and 1.2% next year. Adrian Hilton, head of global rates and currency at Columbia Threadneedle Investments, responds: “We found Draghi’s tone to be more relaxed than many had expected, suggesting that he views the euro’s appreciation as reflective of improved economic fundamentals. At its present level, at least, he doesn’t seem to think the euro threatens the medium term inflation objective.”
While managers and industry experts anticipate the introduction of tapering measures in 2018, uncertainty remains with regard to the pace of these changes.
Torgeir Høien, macro economist at Skagen argues: “Today’s main lesson: The ECB, which only target 2% inflation, has lowered its inflation forecast despite strong GDP growth. This increases the chances that the ECB will keep buying government bonds on a huge scale beyond December 2017 and it increases the likelihood that the ECB will keep its policy rate at their current well beyond 2018.”
Marilyn Watson, head of Global Fundamental Fixed Income Strategy at BlackRock predicts: “Given the currency bloc’s improving fundamental backdrop and recent impressive data releases, particularly in Germany, not to mention the shortage of supply of bonds to buy, we believe that the ECB will fully taper its asset purchase programme by the end of 2018.”