The main message from today’s ECB meeting was that ECB is in implementation mode, as Draghi said the ECB policies work but must be given time. Related to the immediate need for additional easing, Draghi concluded that broad financing conditions have indeed improved, which support our view that the ECB will remain side-lined in coming months. This should follow although Draghi said the ECB “will continue to monitor closely the evolution of the outlook for price stability and, if warranted to achieve its objective, will act by using all the instruments available within its mandate”.
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On policy rates, Draghi repeated the forward guidance from the March meeting stating that the ECB expects interest rates “to remain at present or lower levels for an extended period of time and well past the horizon of our net asset purchases”. When asked about cutting rates further, Draghi concluded that if conditions change the ECB stands ready to use all available instruments. Once again, he argued about the complexity of negative interest rates, but so far the ECB concluded that the experience has been broadly positive with no sign that it hurt banks’ net interest income.
Overall, we conclude that the door for additional rate cuts is not completely closed, but we still expect the ECB prefers other instruments over rates. We expect the ECB will remain on hold over the coming months while it waits to see the effects of its recent policy initiatives.
In a longer term perspective, we believe the ECB will extend the QE purchases beyond March 2017. This should follow as inflation in our view will not pick-up sufficiently for the ECB to remain on hold. We do not expect additional rate cuts, but a strong appreciation of the effective euro could force the ECB to cut again.
