The ECB left policy unchanged in September and mentioned euro volatility as a concern. An announcement how asset purchases will be conducted in 2018 is likely to follow at the next meeting in October.
As expected, the European Central Bank (ECB) left monetary policy on hold and did not announce any changes to its asset purchase program in 2018. Regarding the latter, ECB President Mario Draghi remarked in the press conference that “the bulk of the decisions will probably be taken in October,” i.e. at the next ECB meeting on 26 October. According to Mr. Draghi, the Governing Council (GC) already had a preliminary discussion about various scenarios for the quantitative easing (QE) program in 2018, including the size of monthly purchases, the length of the program and trade-offs between the two. Therefore, only unexpected adverse market and economic developments should cause a delay of the decisions on the QE program beyond October to the December meeting.
On the recent euro appreciation, the policy statement noted that the volatility of the euro was a source of uncertainty that required monitoring, but Mr. Draghi refrained from trying to talk down the euro, as expected. The euro appreciation was also reflected in the new economic projections, with inflation forecasts for both 2018 and 2019 being reduced by 0.1 percentage points each, bringing them to 1.2% YoY and 1.5% YoY, respectively. Growth forecasts for 2018 and 2019 were left unchanged at 1.8% YoY and 1.7% YoY, respectively.
Overall the ECB kept a cautious tone a the September meeting. The downward-revision of the inflation forecasts as well as its worries about the appreciation of the euro indicate the ECB is very likely to also take a careful approach when deciding about adjusting its QE program. As such we feel confident with our current expectation that the ECB will reduce its QE program in quarterly steps of EUR 15 bn, starting in January 2018. Given that the ECB has many options for adjusting length and size of the program in 2018, uncertainty around the precise outlook for the tapering process is relatively high.
OTHER DATA HIGHLIGHTS
RIKSBANK, POLICY RATE: In line with expectations, the Riksbank left its policy stance unchanged and kept the repo rate at –0.5%. It changed its target inflation to the “Consumer price index with a fixed interest rate” (CPIF) and also introduced a target band of 1%-3% YoY, two adjustments that were widely expected and are unlikely to have an impact on the monetary policy outlook. Noting the recent upward surprises in economic data, the Riksbank revised up its 2017 GDP growth forecast to 3.2% YoY from 2.2% YoY and the CPIF forecast to 2.0% YoY from 1.8% YoY. The forward guidance of a first rate hike to –0.4% by Q3 2018 was, however, left unchanged. Despite the overall cautious tone of the Riskbank, we believe that strong economic growth and the significant recovery of inflation are likely to push the Riksbank toward policy normalization, possibly even slightly ahead of the ECB.