21.07 Weekly Viewpoint : The July ECB meeting brought no developments.

The attempt to reassure the markets on the timing of the monetary policy reversal succeeded only in part……

As expected, the July ECB meeting brought no changes in terms of non-standard measures. President Draghi used accommodative tones in his address, generally in line with the June speech. The statement confirmed the ECB’s easing bias on purchases, as well as the fact that rates will stay at their current levels well beyond the unwinding of the APP.

At the July meeting, the ECB only discussed the evolution of macroeconomic prospects and of financial conditions, concluding that the overall picture has changed little compared to June. Draghi clarified that his speech in Sintra did not introduce substantial developments, thus implicitly suggesting that the market had read non-existent implications in it. In July, the Council acknowledged “unquestionable” improvements in the macroeconomic outlook, while confirming a balanced assessment of risks to growth, as despite the positive surprises from macroeconomic data, uncertainty remains high on the prospects for the international scenario. Although the growth picture is improving significantly, indications that underlying inflation is increasing remain unconvincing and, in any case, inflation is still far off the levels desired by the Council. Therefore, the statement reasserts that it is necessary to keep a high level of monetary stimulus in place to help inflation return towards 2%.

Draghi, during the press conference, reported that the Council unanimously deemed it appropriate to confirm its easing bias on purchases, to counter the risk of an unwelcome tightening of financial conditions, which may slow or even compromise the recovery. For what concerns the future of the purchase programme, Draghi provided no indications. He specified that the Council has still not agreed on a specific date on which to begin discussing the timing and technicalities of the purchase programme tapering, simply indicating that this will take place in the autumn, when more information will be available on the outlook for inflation in the medium term, and the evolution of financial conditions. The autumn will begin after the meeting on 7 September, although Draghi let on that the discussion will start on that date, when the Council will be able to assess updated growth and inflation forecasts. 

On the whole, the ECB reasserted a very cautious approach to reviewing monetary stimulus, and its commitment to be “persistent” in supporting the recovery. In the present phase, the priority is to reassure the markets ahead of the summer break, easing the fears of an impending unwinding of the purchase programme that had emerged following Draghi’s address in Sintra at the beginning of July. The operation was successful only in part: while the bond market reacted with a modest correction in yields, the EUR/USD exchange rate soared to its highest level in almost two years. Rather than the evolution of rates, the trend of the euro reflects the renewed appeal of the euro area markets, after the French elections dissolved fears of an imminent terminal crisis of the monetary union, and the weakening prospect in the United States of an expansionary fiscal reform.

If July and August data confirm that growth is proceeding at above potential rates, the ECB could initiate the discussion on exiting QE already in September. On that occasion the ECB could change its communication on purchases, indicating that it is ready not only to step them up, but also to reduce them, and that in any case it will be active on the market for the better part of 2018. The extension of the programme, at reduced volumes and subject to review in the opening months of 2018, could then be announced at the meeting at the end of October, or in December.

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