Speaking to a European Parliament committee this week, Mario Draghi, president of the ECB, confirmed that the ECB is still on course to cease QE by year-end. The ECB chief said that despite recent data being “somewhat weaker than expected,” the ECB still anticipates that “net asset purchases will come to an end in December 2018”.
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QE Wind Down To Be Data Dependant
However, the market seemed to react with some caution as the ECB chief said that ultimately, this decision would be “subject to” incoming data confirming the bank’s medium-term inflation outlook.
Given the current weakness in data and the dramatic decline in oil prices recently, there is a fear that the ban might be forced to delay into Q1 next year or longer.
Commenting on the inflationary environment, Draghi said that “measure of underlying inflation” remain “muted”, though he did mention that “generally there is good reason to be confident that underlying inflation will gradually rise in the period ahead.”
Furthermore, Draghi stated that even once the bank’s huge QE program has been wound down, “a significant degree of monetary policy stimulus will be retained.”
However, no mention was made as to the bank’s outlook on its rate path next year. In its latest meeting, the ECB reaffirmed its view that rates will stay on hold until at least through summer 2019.
ECB Chief Economist Says ECB Will Continue to Support Eurozone Economy
These comments echo those of Peter Praet, the ECB’s chief economist, who recently said that, in consideration of the visible slow down in growth, the ECB will continue to support the eurozone economy.
“The sizeable stock of acquired assets and the associated reinvestments, as well as the strong anchor for policy rate expectations provided by our enhanced forward guidance, will continue to deliver the monetary policy stimulus necessary…In any event, all our policy instruments can be adjusted to ensure that inflation moves towards our aim in a sustained manner.”
Commenting on recent data weakness, with Euro area growth having slowed down to its lowest level in four years, Praet said that this reflected the loss in global momentum and that domestic demand remains resilient, adding that officials need to look through the noise in the data.
Only Significant Change Would Lead ECB Back Into Non-Conventional Measures
Praet added that only a “substantial degree of change” in the ECB’s current assessment would force the bank back into utilizing non-conventional measures and added:
“Our forward guidance remains an effective firewall to insulate the euro area from unwarranted tightening pressures originating elsewhere.”
Looking ahead to the hotly anticipated December 13th meeting, the ECB’s chief economist affirmed that the bank will elaborate more on the horizon for its bond reinvestments.
Prate explained that current market expectations are for the ECB to reinvest the proceeds from maturing bonds for “something between two and three years.”
He further stated: “We look through the noise in the data before we clarify this,” adding “I don’t think we need necessarily to rush.” Finally, Praet claimed that whatever happens, the ECB “will remain predictable, and we will proceed at a gradual pace.”
EURUSD is still sitting on the 1.1298 level support which fuelled a rebound higher in July. Though price recently breached the level, we climbed back above after finding support at a test of the falling wedge bottom (lower trendline). While still holding above 1.1298, the chance of a reversal higher is still in play. Below the current levels, the next key support is down at 1.0912.