ECB caution but intent seems pretty clear to us - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the market over-reacted somewhat to the comment from President Draghi in his post-monetary policy meeting press conference that the Governing Council did not even discuss extending QE at yesterday’s meeting.

Key Quotes

“However, the crucial take-away from the meeting was the setting up of internal studies by ECB staff committees in order to “evaluate the options that ensure a smooth implementation” of the ECB’s asset purchase programs. Given that process was set up, it would have been futile having a discussion on extending QE.

The ECB yesterday made very minor adjustments to staff forecasts with the annual inflation rate next year cut from 1.3% to 1.2% while real GDP growth forecasts were raised this year by 0.1ppt to 1.7% and then cut by 0.1ppt to 1.6% for both 2017 and 2018.

Nothing major there. The forecasts were based on modestly lower assumptions for both the EUR/USD rate and the euro EER-38 exchange rate. EUR/USD is now assumed to trade at 1.1100 through the forecast period. What that does mean of course is that any notable spike, say toward the 1.2000 level would have a meaningful enough impact on the ECB’s inflation projections and would encourage the ECB toward further monetary easing.

We still expect an extension of QE and that will probably come at the December meeting. That in itself is nothing major – as Draghi himself rightly pointed out yesterday, the ECB makes the commitment to continue QE for as long as necessary in order to achieve its inflation goal at every meeting in its statement. Near-term it will be the Fed that has greater potential in moving EUR/USD and hence all eyes will be on Rosengren’s speech today and Brainard’s on Monday.”