Again we repeat our commentary: Is the ECB worried about the low inflation environment? YES! Does it know what else to do from a policy perspective to spur real growth and inflation? NO!
In today’s ECB monetary policy decision meeting, President Draghi underlined a few main points:
- Rates are expected to stay at present or lower levels for an extended period of time, well past the horizon of asset purchases.
- Monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary.
- If warranted, the ECB will act to use all instruments in its tool belt to support economic conditions.
Our quick read-through:
- Growth and inflation will remain lower and slower for longer than the previous time horizon (see the downgrade in updated ECB staff projections below).
- The ECB will have to extend the scope of its Asset Purchase Program, can you say #HelicopterMoney?!
GIP Flashes Quad 3:
Our proprietary GIP (growth, inflation, policy) model shows the Eurozone stuck in Quad 3 - growth slowing as inflation accelerates - for the remainder of 2H 2016 and into early 2017.
And we reiterate the huge challenge before the ECB to lift inflation: the latest Eurozone CPI for August printed +0.2% Y/Y, unchanged from the prior month and below the 0.30% forecast. CPI has been at or below 0.3% for 22 straight months, and far from the ECB’s medium term 2.0% target!
Today’s Decision: the ECB kept its main interest rates and Asset Purchase Target on hold:
- Main Refinancing Operations unch at 0.00%
- Marginal Lending Facility unch at 0.25%
- Deposit Facility unch at -0.40%.
- Monthly Asset Purchase Target unch at €80B
ECB Staff Projections Downgraded:
- Eurozone GDP Projections at 1.7% in 2016 (vs prior June projection of 1.6%), 1.6% in 2017 (vs 1.7% prior), and 1.6% in 2018 (vs 1.7% prior).
- Eurozone CPI Projections at 0.2% Y/Y in 2016 (unch vs prior), 1.2% in 2017 (vs 1.3% prior), and 1.6% in 2018 (unch vs prior).
Weighing the Euro: We’re playing our trading risk range of $1.11 to $1.13 on the EUR/USD and have a bearish intermediate term TREND bias on the cross.
