- ECB is confident that QE will be a success, as it becomes more positive on growth…
- … while expecting inflation to return to around its goal in 2017
- Bond yields fall on Mr Draghi’s statement
ECB starts purchases on 9 March
ECB president Mario Draghi announced that the central bank will start its government bond purchases on 9 March as expected. Mr Draghi repeated that the monthly purchases of EUR 60bn are intended to be carried out until end-September 2016 and will in any case be conducted until inflation is expected to rise to 2% over the medium term. He added that the ECB is prepared to also buy securities with yields below zero, but not below its deposit rate of -0.2%.
Meanwhile, Mr Draghi asserted that the ECB already “sees a significant number of positive effects from its monetary policy decisions”, including the impact of the announcement of its QE programme. According to Mr Draghi, the ECB’s measures “will contribute to a sustained return of inflation towards a level below, but close to, 2% over the medium term and underpin the firm anchoring of medium to long-term inflation expectations”.
Staff projection for GDP growth raised, …
In its new staff macroeconomic projections, the ECB has raised its forecasts for GDP growth, roughly reversing the downward revisions it made in December. It expects GDP to grow by 1.5% this year and 1.9% in 2016 (up from the December forecast of 1.0% and 1.5%, respectively). It added a forecast for 2017 of 2.1%. Mr Draghi mentioned that the upward revision reflected “the favourable impact of lower oil prices, the weaker euro exchange rate and the impact of the ECB’s recent monetary policy measures”. The forecast for GDP growth this year is close to our own estimate of 1.6%, whereas we are somewhat more positive than the ECB for 2016 (2.2%).
… while inflation should rise to close to the target in 2017
The downward impact of oil prices should push average inflation down to 0.0% this year, according to the new ECB staff projections. However, Mr Draghi added that “supported by the favourable impact of the ECB’s recent monetary policy measures on aggregate demand, the impact of the lower euro exchange rate and the assumption of somewhat higher oil prices in the years ahead, inflation rates are expected to start increasing gradually later in 2015”. The ECB expects a further rise in inflation in 2016 (to 1.5%) and 2017 (to 1.8%). Regarding the core inflation rate, Mr Draghi mentioned that it should be lifted by the euro exchange rate, a rise in disposable household income and a gradual closing of the output gap between now and 2017. Therefore, the ECB seems confident that inflation will meet its target level on a sustainable basis.
Impact on financial markets
The euro initially rose on the upward revision in eurozone growth forecasts. Also his comments that the downside risks have decreased also gave support to the euro. As a result, EUR/USD moved back above 1.11 and made a high of 1.1114. During the Q&A session the euro fell under pressure again after Draghi’s comments that the ECB could continue buying government bonds until they “reached the level of the negative deposit rate”. We expect the euro to fall further versus the US dollar going forward because of the impact of QE and diverging monetary policy paths on either side of the Atlantic.
Meanwhile, German 10y government bond yields declined on Mr Draghi’s statement, on balance, while peripheral spreads over Germany tightened. Eurozone equity prices fell during the first few minutes of Mr Draghi’s statement, but bounced back later and ended up a bit higher, on balance. We expect these trends in financial markets to continue.