Hello and welcome to our live coverage of the ECB’s July rate decision. We are not expecting any changes to interest rates but after Mario Draghi surprised the markets in late June with upbeat remarks about the state of the recovery in the eurozone his message today will be more closely watched than usual.
Claire Jones says the watch-words for today will be “confidence”, “persistence” and “prudence”.
Markets had a stormy day at the end of June when comments by Mario Draghi were misinterpreted as signalling that the ECB was poised to announce a tapering of asset purchases.
The ECB president faces the unenviable task of not only having to soothe market jitters, but also keeping his council united ahead of what promises to be a testing autumn.
Where we stand
The ECB is currently buying €60bn a month in mostly government bonds until at least December under its current forward guidance.
As of June, the ECB dropped its promise to cut rates again from record lows. Last month's statement read:
The Governing Council confirms that the net asset purchases, at the current monthly pace of €60 billion, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim./
The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.
Most ECB watchers are not expecting any change in the formal language of the governing council. Instead, all eyes will be on Mario Draghi's grilling in front of journalists. The key question is whether he gives markets signs that his bullish comments on the eurozone recovery and end of deflation threats will lead to a faster than expected "tapering" of bond purchases.
The Draghi paradox: when good news is bad
No major policy change is on the cards today but the July meeting - the last before the summer break - could cement a shift in thinking in the ECB over the state of the eurozone's recovery:
But as today's Brussels Briefing notes, good news is often bad news for financial markets:
Mario Draghi, ECB president and erstwhile market soothsayer, is in a pickle.
Having spent the past five years promising to keep the single currency together, fighting off German critics, and overseeing an unprecedented stimulus blitz, Mr Draghi has become a risk factor for investors.
His comments last month that the eurozone had successfully vanquished deflation were meant to mark another small victory in the continent's steady recovery.
"We can be confident that our policy is working and that those [deflation] risks have abated. The threat of deflation is gone," Mr Draghi told an audience of grandees in the Portuguese mountain town of Sintra at the end of June.
But in the topsy turvy world of post-crisis monetary policy, good news is bad.
The optimism was taken as a signal the ECB was preparing to trim back the €60bn-a-month bond buying it has promised to carry out until at least December. The euro has duly rocketed to its strongest level since May 2016 and German government borrowing costs have doubled in three weeks (albeit to a still manageable 0.56 per cent).
Analysts' predictions (part I)
Despite heightened speculation over the past month about the ECB’s move towards policy normalisation, analysts are expecting them to stand pat at this meeting, leaving any announcement on the tapering of asset purchases until September.
But some are expecting a change in the Governing Council's language around the future of asset purchases.
Victoria Clarke at Investec
We expect the ECB’s Governing Council to hold key policy rates steady...We also expect the ECB’s Asset Purchase Programme to be confirmed as continuing at a pace of €60bn a month...Back in June, the ECB removed its easing bias on interest rates from its policy guidance, deleting references to the possibility of ECB interest rates being lowered. This time around we suspect it is the guidance on QE that will be amended.
Analysts at Citi
We reckon core HICP inflation has room to rise further, albeit modestly, from current levels over the coming months amid improving demand, allowing the ECB to continue along its very gradual monetary policy normalisation path.
The fact that loan demand remains strong should give the ECB confidence that credit growth and broadly easy financial conditions can persist alongside a gradual removal of its ultra-easy monetary policy stance. That is consistent with our expectations for the ECB to confirm but not to reinforce its recent hawkish shift at this week’s meeting. That is likely to involve further incremental adjustments to language, with the easing bias related to the pace of QE most likely to be removed.
Tim Davis at Fathom
We do not expect any specific changes in policy to be announced until the September meeting at the earliest. There may be some further tweaks to the language, but we do not think any adjustment to the QE programme will be announced this month.
Fabio Balboni, reacting to the latest ECB bank lending survey which showed a further easing of credit conditions and a pick up in credit demand among corporates
All in all, the monetary policy transmission channel still seems to be working well in the eurozone, which in our view reduces the need - if ever there was any - for the ECB to act to possibly hike rates before the end of QE.
Euro area inflation remains subdued, but it is growth that is surprising the ECB this year…[we] see 2017 growth running well above the ECB staff forecast. Against this backdrop [this] week’s meeting is likely to signal a tapering decision in September.
Markets watch: euro flat, Bunds yields rise
The euro has slipped back further from a 14-month high against the dollar ahead of today's meeting. The single currency is trading flat at $1.15094 at publication time.
German 10-year Bund yields, which have rocketed in the last month, are up 1.2 basis points to 0.56 per cent.
European assets were roiled by Mario Draghi's speech at the Portuguese mountain town of Sintra last month, where he declared victory over deflation and hinted at tweaks to the asset purchase programme.
Other senior ECB officials, such as chief economist Peter Praet, have since come out to dampen market expectations of an early tapering by stressing the still low wage growth and under-target inflation in the eurozone.
Analysts' predictions (part II)
More doveish analysts expect Mr Draghi to tone down some of the upbeat statements that he made in Sintra last month and avoid any change in forward guidance to help calm market jitters.
Claus Vistesen, Pantheon Macroeconomics:
The ECB is unlikely to make any changes to its policy stance today...We also don’t expect any substantial change in the language on forward guidance and QE...We also think that the president will reiterate that the ECB’s increasingly confident assessment of the economy’s health is conditional on the full implementation of planned monetary stimulus....Our base case is that the QE and negative rates will remain a part of the ECB’s policy stance until the end of 2018.
David Kohl, chief currency strategist at Julius Baer:
We...see a high probability that the ECB will disappoint euro bulls at today’s meeting by simply acknowledging that a phasing out of asset purchases had been discussed but no decisions had been taken. There are good reasons why the ECB is warming up for a tighter monetary policy stance, but the degree of euro strengthening suggests that the speculation has moved a bit ahead of itself.
Andrew Bosomworth, head of PIMCO portfolio management in Germany:
We think he will...emphasize the persistence (need to maintain accommodation) and prudence (need to remove accommodation only gradually) aspects of the Sintra speech over the confidence part (that QE is working). We also expect the ECB to leave forward guidance concerning the policy rate and asset purchase programme unchanged.
Inflation's not quite there yet
Eurozone inflation has been jumping around this year, hitting its 2 per cent target in the spring but since falling back to 1.3 per cent. The future path of consumer prices is crucial in underpinning the ECB's support for stimulus measures.
Economists at Barclays think inflation will still fall short of the ECB's near 2 per cent target over the next two years, and have just revised down their HICP forecast.
We now forecast headline consumer prices inflation to average 1.4% in 2017 and 1.2% in 2018. Compared to our previous forecasts, the updated profile is 0.2pp lower for this year and 0.1pp for 2018.
Weaker euro-denominated Brent crude oil price assumptions are largely responsible for the downgrade.
The outlook for wages remains uninspiring. We believe that the current employment-rich recovery experienced by the euro area may not be sufficient enough to put nominal wages on a steep and steady trajectory as structural factors continue to hold back wage developments.
All eyes will be on whether or not the following two sentences from the June statement are repeated verbatim today:
On maintaining low interest rates:
The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.
On the ECB’s easing bias in asset purchases:
If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.
ECB keeps rates unchanged in July
No change, as expected. The ECB has kept all its main rates unchanged this month. Here's where we stands:
- Deposit rate: -0.4 per cent
- Refinancing rate: 0 per cent
- Marginal lending facility: 0.25 per cent
A reminder that the press conference is due in 45 mins. You can watch along live here.
No change in forward guidance
The ECB's language around the future of asset purchases remains unchanged from their June statement.
In a dovish move, the Governing Council have repeated that "if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation" they "stand ready to increase the programme in terms of size and/or duration".
Euro dips as ECB keeps language unchanged
The single currency has weakened after the ECB did a cut and paste job on its July statement. In particular, the governing council maintained its promise to expansion the "size and/or duration" of bond purchases.
The euro is down 0.25 per cent against the dollar at publication time, having been steady before the decision.
Chart via Bloomberg
Caution prevails at the ECB
A blow for the hawks?
Here's the FT's Claire Jones' take on today's decision:
The European Central Bank has kept a commitment to boost its landmark quantitative easing programme if the eurozone's economy takes a turn for the worse, in a move that will upset the governing council's hawks who think the bank needs to do more to convince markets it is serious about winding down its bond buying spree.
The ECB's governing council, meeting today in Frankfurt, opted to stick with a promise "to increase the [QE] programme in terms of size and/or duration" if "the outlook becomes less favourable".
A move to drop the reference was expected by some ECB watchers and would have been viewed as a sign that the ECB intends to taper its €60bn a month plan in 2018.
The council also left the ECB's main refinancing rate unchanged at 0 per cent and the deposit rate on reserves parked at eurozone central banks at minus 0.4 per cent.
Reaction from Carsten Brzeski at ING
The ECB is staying on the dovish side and does not seem to be in a hurry to move towards tapering. Given the experience of earlier meetings, the message of the...release is the main message the ECB would like to give market participants to start their summer vacation with.
Not only did the ECB keep interest rates unchanged, but it also kept the language on QE unchanged....In our view, this is a clear sign that the ECB does not want to pour more oil on the small taper tantrum fire seen in financial markets over the last few weeks.
We will hang on until the press conference...for further hints about the ECB’s upcoming tapering plans during the Q&A session.
Analysts are pinning their hopes on the 1:30pm press conference to provide more of a hint about future ECB policy.
Jack Allen at Capital Economics says
The ECB’s press release gives little away, but at the press conference we suspect that President Draghi will provide some hints at an imminent decision on QE tapering.
Given the increases in bond yields and the appreciation of the euro since Mr Draghi’s Sintra speech, some investors might now expect him to present a dovish message at the press conference.
But to us, this seems unlikely. We don’t think that it is necessary for the Bank to remove the references to a possible QE expansion before it starts to taper. And if the ECB is edging towards tapering QE, giving dovish signals at today’s press conference could ultimately spark unnecessary volatility. So we think that Mr Draghi will hint that a decision on tapering will be made at the Governing Council’s next meeting, in September.
The only differences between today's statement and the last one in June are that the meeting took place in Frankfurt, not Tallinn - and the Governing Council decided to change from the future to present tense toward the end.
You can read a summary of what has happened so far from Claire Jones over on FastFT - but do come back to join us for the press conference in two minutes.
Draghi's running late
Still no signs of ECB president Draghi in Frankfurt. He's three minutes late. Watch this space.
And we begin
Mario Draghi is in the building, flanked by his vice governor Vitor Constancio and head of communications. There are a few more empty seats than usual in the press gallery.
Draghi: we're still not there on inflation
Mr Draghi begins his address by tackling the thorny question of inflation head on.
Inflation has yet to translate into stronger inflationary dynamics, he says despite a jump in prices this year. Inflation has been dampened by soft energy prices, while core inflation remains at "subdued levels" adds Mr Draghi.
Thus "a very substantial degree of accommodation" is needed, says Mr Draghi, repeating his long standing mantra at these governing council measures.
Inflation is currently running at 1.3 per cent and is set to remain at "current levels in coming months", notes the ECB chief.
Draghi explains that growth risks continue to be balanced
Current cyclical dynamics increase chances of a stronger upswing...On the other hand downside factors [predominantly global] ...continue to exist.
For those that can't access Twitter, the Tweet from Bloomberg's Lorcan Roche Kelly says: Word of the day: "Subdued" #ECB
Mario Draghi says that economic and monetary analysis "confirm the need for a continued very substantial degree of monetary accommodation"
Draghi the dove
The ECB chief is sticking to the script in his opening statement. As many expected, he is dampening any expectations that a tapering could be on the way.
Now for the good bit. The Q&A...
Q: Did you hold formal talks over changing QE measures at today's meeting?
Mr Draghi says the discussion was a "review of economic developments" and that a sustained inflation pick remains elusive. He adds that the governing council had a "general reiteration" of the view that inflation still needs lots of stimulus place to keep moving up.
Summarising, Mr Draghi said today's discussion was only about the "concept of confidence" rather than a specific discussion over QE. There is no precise date to discuss any changes to QE apart from saying they "should happen" in the Autumn he added.
Or to sum up:
We need to be persistent, patient and prudent, because we aren't there yet.
Roger Blitz reports that the euro gained on Mr Draghi's remarks about growth, recovering losses from earlier in the day of a quarter of a per cent to be marginally up, trading at around $1.1530. His remarks about the subdued nature of inflation and the risks to growth have kept it there.
The euro is something we are watching
The euro hit its highest level of the year in the wake of Mr Draghi's Sintra speech. Although the currency is not targetted by the ECB, a stronger currency tightens financial conditions and makes inflation harder to generate.
Mr Draghi says the governing council has had discussions over the exchange rate and it is something policymakers are watching and it has received "some attention".
Q: Is there any concern in the Governing Council that a taper tantrum like that in the US in 2013 could happen in the Eurozone?
In his response, Mario Draghi stressed that the GC's bias is still towards further easing:
Inflation is not where we want it to be and where it should be. We are still confident that it will gradually get there but it is not there yet. That is why we reiterated...our package of monetary accommodation...is still needed.
After a long time we are finally experiencing a robust recovery where we only have to wait for wages and prices to follow course to our objective. The last thing the Governing Council may want is an unwanted tightening of the financing conditions...that may even jeopardise [this process]. That’s why we retained the second bias or reaction function...we stand ready to increase our asset purchase programme in terms of size or duration.
He added that the Governing Council had scope to ease further if needed.
Draghi: nothing I've said on inflation has changed
Mr Draghi responds to a question from the FT's Claire Jones on whether the ECB really thinks reflation is back in the eurozone. He responds:
Much was made of the word "reflation". This means when prices fall below the trend line and then recover. That is the technical definition.
The Sintra speech said reflation has replaced the risk of deflation. So no big differences.
Mario Draghi batted away another question on whether the Governing Council were confident that they can withdraw monetary stimulus without creating volatility, saying:
We are confident that this process can be brought forward in a smooth way...the Governing Council has given enough evidence in the past that it can use all the flexibility that is needed
Euro building a head of steam
The FT's currency correspondent, Roger Blitz says there's a bit of a head of steam behind the euro now, as Mr Draghi's Q&A gets going. The euro is up to $1.1570, back to the level at the start of the week, and half a per cent higher on the day. If the ECB president is hoping to dampen the market's tapering, it isn't yet working
Asked about future ECB purchases of Greek government bonds, Mr Draghi said that would only be considered once Greece that cleared the review of its third bailout program.
No technical analysis of options for QE withdrawal is being carried out
Mario Draghi said that ECB staff had not yet been tasked with "look[ing] at technical options for QE beyond December".
Draghi reticent on Greek bond market return
The Greek government is planning to tap the bond markets for the first time in three years in the coming weeks, a move that has raised concerns at the Bank of Greece (the national central bank).
Mr Draghi echoes some of those concerns. He says market confidence can only be restored by the "sound implementation" of Athens' bailout programme.
"Wage relationships have changed"
Mario Draghi comments on a puzzle that has been seen across the developed world economies. He says wage responses to improvements in the labour market have changed after the financial crisis.
The key is for us is are they [wages] going to be permanent, or structural, or will we return to the relationship we used to have in the past?
The conclusion we draw is one of great caution, but in the end yes, the relationship will go back.
Trust me, the Governing Council have not talked about tapering
Mario Draghi was asked whether the Governing Council might first take the decision to announce a scaling back of QE before sometime later saying how they would do that. But Mr Draghi says that has not been discussed.
The euro is rallying
The euro climbed close to 14-month highs on Thursday afternoon after the head of the European Central Bank said the currency’s recent rally hadn’t been enough to worry the bank’s governing council, though he signalled it’s still not close to shifting policy.
ECB have no plans to change their inflation target
Asked whether the Governing Council had considered changing their target, Mr Draghi said:
The reasons that led all the major central banks to adopt the 2% objective in the early 2000s are still valid. Specifically in the euro area...they are still valid.
It’s true our monetary policy measures have been in place for quite a long time. They produced very significant effects...on the real side. It’s the response in terms of inflation that we are still waiting for...we’ve got to be patient rather than changing the objective.
How credible is any institution if when it doesn’t achieve the objective it changes it? To even discuss a change in objectives would be destabilising.
When is 'autumn'?
Mr Draghi has repeated the governing council will discuss QE changes in the autumn. But when is the autumn?
In typical central bank fashion, Mr Draghi says this is being "deliberately" kept open. It could, or could not be the next meeting on September 7. Obviously.
Growth is uneven across the Euro area - but that's not the ECB's remit
Mario Draghi said:
What we say about growth momentum and strong recovery is an average...there are spots that have not seen such a great recovery...that is something that should always be kept in mind...areas where slack remains significant...Having said that, we should remember that our mandate is neither growth nor employment but it is price stability...that's what we have to look at in terms of deciding whether we are moving successfully.
Purchases of German bonds have fallen below the capital key targets in the past three months but Mr Draghi said that the Governing Council had not discussed buying more corporate debt instead.
And we're done
The July press conference is over. The euro has picked up from its daily lows after Mr Draghi stuck to the script that the eurozone's recovery still has plenty of way to go.
The key message? Forget the Sintra speech last month. The continent still needs a "substantial" amount of stimulus to keep price growth at its current levels.
Post-match reaction: markets shouldn't get ahead of themselves
Marchel Alexandrovich, chief European economist at Jefferies:
In reality, there are no big changes from the June press conference or the keynote speech from a few weeks ago. And the overall message is that while the economy is recovering, inflation will only return to target as long as the ECB maintains its accommodative policy stance.
But Draghi is also making sure that the markets don’t get ahead of themselves and start pricing in QE adjustment before the ECB settles on the right policy path.
In fact, Draghi seems to allow for the possibility that the decision on how to extend QE will not be announced in September, and the exact details may follow later – 26 October, or even 14 December.
Patrick O’Donnell at Aberdeen Asset Management:
This is a well-choreographed attempt by Mr Draghi to make sure that financial markets don’t get ahead of themselves after his more hawkish comments of late. >He was at pains to stress that financial conditions are still supportive of higher inflation. This is his way of endorsing the rise in bond yields and the appreciation in the euro that happened after his Sintra speech. Yet he has stopped short of actually doing anything material.
We probably won’t hear anything significant out of the ECB until September, which is plenty of time for investors to digest Mr Draghi’s caveat laden hawkishness. Mr Draghi will be hoping that today’s performance is enough to give him a quiet summer.
Timothy Graf from State Street Global Markets:
After a recent flirtation with more upbeat rhetoric, the dovishness of ECB president, Mario Draghi and company comes as a surprise. Below-target inflation always meant tight policy was a long way off, but some hint of extraordinary easing measures coming to an end was a reasonable expectation given the strong tone to eurozone data.
European markets should like the news and we look for the recent under-performance of peripheral bonds to reverse. The trade-weighted euro also has ample room to test lower and retrace a portion of its 5 percent gain over the last quarter.”
Claus Vistesen at Pantheon:
Come back after summer, and don’t overthink Mr. Draghi’s Sintra speech.
The ECB broadly achieved what it wanted today we think. Mr. Draghi struck an altogether dovish tone, and downplayed the idea that his Sintra speech marked a hawkish shift. In other words; the president reverted to the story told at the June ECB meeting.
Mr. Draghi snubbed all questions about changes to QE, deferring to autumn, when the central bank will have more information to make a decision on how to continue QE, if at all, after December. We struggle to see, however, how the ECB can announce tapering anytime soon
Euro edges up
The euro stood at $1.1550, after today's press conference, one-third of a cent up on the day, writes the FT's currency correspondent Roger Blitz.
That may not be much of a move, but it is higher than its level at the start of his remarks, and there were plenty of market commentators anticipating a day when the euro would pull back to around $1.1450. Mr Draghi appears to have played it safe, giving the market little to drive the euro substantially higher or lower.
Summary of events
That's almost it for today's live blog of the last ECB meeting before the summer break. The central bank's governing council will be convening next on September 7. Mario Draghi will be giving a speech at the Federal Reserve's Jackson Hole conference in August before then.
Here's our wrap of today's meeting:
- Nothing has changed: Draghi insists the ECB's stance on stimulus shifts has not changed over the last month after he made bullish remarks on the eurozone recovery at the end of last month. He repeated that the eurozone needs a "substantial" amount of stimulus to stoke inflation.
- Eyes on the autumn: Mr Draghi said there was no "specific" date when the ECB will think about a change in its bond buying programme but would hold discussions in the "autumn". Whether autumn means September or not, he refused to confirm.
- Forward guidance holds steady: The ECB kept its promise to expand or extend its €60bn a month bond buying programme should inflation fall below target. Inflation is currently running at 1.3 per cent - the same level at which it would stay for the coming months, said Mr Draghi.
Eyes turn to Jackson Hole: A reminder that Mr Draghi's speech will be taking place on August 26 at the Fed's annual conference.