The European Central Bank’s (ECB) Governing Council decided yesterday to keep monetary policy unchanged in the euro area but signalled strongly that, all being well, policy would be ‘recalibrated’ at the October meeting. So we will all have to wait until later in the year to see the results of this meeting and whether the pace and makeup of purchases (currently spread across three programmes, the PSPP, CBPP, and the ABSPP) will change.
Mr Draghi did rule out any change to the amount of each bond it can buy (issuer limits) and also ruled out any change to potential sequencing of its removal of accommodation – in other words, the projected path of reducing asset purchases first and then moving interest rates remains unchanged. This outcome is unlikely to come as much of a surprise to financial markets as few had been expecting any clarity at this stage in the year.
The ECB also announced its latest staff forecasts for the Eurozone economy in 2017, 2018 and 2019. Economic growth has been revised up in 2017, reflecting the current positive environment, but forecast were left unchanged for 2018 and 2019. Inflation however was revised slightly lower for 2018 and 2019, reflecting for the first time some pass-through from the strength of the euro. The revisions made were quite small so while there was some note of euro volatility in the accompanying statement, it signalled that (at this stage) the ECB is not too concerned over the external value of the euro.
We continue to expect tapering to start in 2018, and think that some change in the composition of asset purchases is likely given the ‘shortage’ of German government debt. In our view this will add to the relative attractions of peripheral European debt, already performing well as the outlook for the Eurozone economy continues to improve. As long as there is no political hiccup, the better economic outlook will continue to benefit credit ratings across the region, with most countries in the periphery likely to retain a stable or positive outlook.