ECB: Bold is beautiful

President Mario Draghi took a bold stance at the ECB press conference on Thursday. Not only did Draghi announce the timeframe for ending the asset purchase programme in 2018 but he also provided forward guidance on the unlikelihood of an interest rate hike until the summer of next year, subject to incoming data. Taking into consideration the occurrence of the meeting comes just weeks after the Italian political turmoil, it is likely that Draghi was trying to project the most politically unbiased stance of the ECB to the markets.

This was contrary to most analyst expectations, as a forward guidance language on rates was only expected at the December meeting. In addition, the projected timeframe for the next rate hike is longer than investors had originally expected. It appears that Draghi has found the perfect balance for the hawks (ending an era of easy money) and doves (strengthened forward rate guidance). The timing of the end of the stimulus is viewed as a trigger for speculation on when the ECB will raise rates. According to the Eonia-dated contracts, it now appears more likely that the first-rate hike won’t take place until September 2019, provided inflation is sustainable. This is close to the time that Mario Draghi retires from his current position in October 2019. The market is becoming convinced this is a slightly dovish set of policy changes.

As the ECB’s mandate remains focussed on price stability, it shrugged off a series of downbeat macroeconomic data in the euro area and contagion spreading from Italian political risks, drawing attention to the sustained adjustment in the path of inflation as the reason for ending its bond buying program. According the latest staff projections for GDP, growth was revised lower for this year, while the outlook for 2019 and 2020 remain upbeat. While the inflation outlook was lifted higher to 1.7% from 1.4% each year until 2020. It seemed contradictory that the ECB remained optimistic on the forward growth projections despite central bank staff projections for 2018 being lowered to 2.1% versus 2.4%. It is also worth noting that the decisions to changes on forward guidance were unanimous and Draghi confirmed there was a desire to retain optionality should conditions deteriorate.

The dovish undertone coupled with greater clarity from the ECB on the path ahead seemed to resonate across the markets, the euro dipped 1% while European equity markets closed higher by1.23% and bond yields in Germany, Italy and Spain declined 0.45%, 2.78% and 1.35% respectively. European equity exporters namely the automakers caught a tailwind from the declining euro, leading the gains on European equity markets after being caught in the crossfire of trade wars.