The European Central Bank (ECB) updated its guidance on both its asset purchase programme (APP) and interest rates at today’s meeting of the Governing Council in Riga. The APP shall decrease from its current size of €30bn per month to €15bn per month from October, ending at the end of December 2018. On rates we got the news that there would be no rate hike until at least after summer 2019. The reaction of the market clearly indicated that it had been expecting a less dovish message, with bonds strengthening and the euro weakening.
Market expectations for this meeting took a hawkish turn earlier this month when ECB chief economist Peter Praet struck a constructive tone on the bank’s progress towards its inflation target. Although ECB President Draghi, corroborated the message that they had made substantial progress on this front (but also acknowledged that while core inflation has ticked up, it remains muted), some tentative concerns on the growth outlook were evident. While still characterising growth as solid and broad-based, Draghi was forced to concede that there was some increasing uncertainty on the outlook, and that the supposed Q1 blip was lasting longer than anticipated.
Overall, the tone of this meeting was of attempting to maintain flexibility and optionality. While the ECB’s hands were tied with regards to having to end the APP in the not-too-distant future, they wish to smooth that transition as far as possible, while also buying time to monitor the disparate economic and geopolitical shocks currently buffeting markets. This all stood in stark contrast to the moderately hawkish message delivered by the US Federal Reserve (Fed) last night. At this stage, pundits may have a hard job determining which comes first: the ECB’s first hike, or the Fed’s last.
Thomas O'Mahony, Portfoliomanager Fixed Income Team, Janus Henderson Investors
