Tuuli Koivu, Senior Analyst at Nordea Markets, points out that today the European Central Bank finally admitted that the growth risks are now biased downwards. She points out that the pricing of ECB rate hikes was pushed further into the future in the past months.
Key Quotes:
“This change in the assessment of the economic outlook did not have any immediate impact on the ECB monetary policy stance.”
“If the Euro-area economy continues to disappoint and growth slows below the potential implying weaker price pressures in the medium-term, the tools the ECB could use are probably new long-term liquidity operations and prolongment of the forward guidance.”
“TLTROs are still in the cards although the meeting did not bring any new information about them.”
“Despite the weaker growth outlook and increased downside risks, the ECB continues to expect that inflation pressures in the Euro area will continue to accumulate. Strong labour market development and higher wage increasing together with still positive growth numbers should start to push prices up. Draghi mentioned that the reason why the delay from wages to prices has taken longer to materialize than the ECB earlier expected has been the profit squeeze of corporates, which is expected to come to an end.”
“Financial markets did not exhibit any big swings during the ECB’s message. Today’s message implies that no decision on further measures, such as new liquidity measures, is not around the corner. The absence of deeper discussion on another round of TLTROs is disappointing for especially Italian bonds and may act as a small headwind for Italian bonds going forward.”
“Draghi’s reluctance to talk about the chance of more stimulus measures should limit pushing the pricing of ECB rate hikes even further into the future. After all, the ECB’s current forward guidance only excludes rate hikes until the autumn, while even a small 10bp rate hike is not in prices in financial markets until late spring 2020.”
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