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Analysts at Standard Chartered Bank, (SCB), explained that the ECB’s Draghi is upbeat on the euro-area economy, but warns of risks from protectionism and volatility.

Key Quotes:

  • Policy makers are confident that rising wages will drive inflation sustainably to target.
  • Reinvestment policy to be discussed at the October or December meetings.
  • QE purchases to end this year (subject to data).

 “Broad-based and above-trend euro-area growth is driving wages higher across the region, and uncertainty over the inflation outlook is receding. This positive message from European Central Bank (ECB) President Draghi came despite slight downward revisions to GDP growth forecasts for 2018 and 2019 (Figure 1). Markets had braced for a warier assessment of the outlook, and even Draghi’s ramped-up warnings about global threats (trade wars, EM concerns and financial-market volatility) failed to dampen the mood.

With underlying inflation expected to converge on ECB targets over the next couple of years, the ECB Governing Council (GC) “anticipates” that, subject to the next few months’ data, QE purchases will cease at the end of this year, after halving to EUR 15bn/month from October. Forward guidance on the rates outlook remained unchanged: the GC “expects” rates to remain unchanged at least “through the summer of 2019″. We forecast the first deposit-rate hike (to -0.3% from -0.4%) in September 2019, with another 10bps hike in December 2019.

The reinvestment of some EUR 200bn of maturing securities will ensure that the ECB remains active in euro-area government bond markets in 2019. The GC plans to discuss the rules guiding re-investment at October’s or December’s meeting. Draghi refused to comment on whether an ‘operation twist’-style of reinvesting could be deployed to support longer-term securities in the euro-area periphery, saying only that purchases would continue according to the capital key that has been used in QE purchases so far.”  

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