As expected, the ECB announced plans to scale back its net asset purchases from €30bn a month to €15bn after September and end them in December.
The decision to end the QE program will be data dependent. At the same time, to offset any potential disruption in the markets, the ECB issued unusually explicit and time-specific forward guidance on interest rates, pledging to keep the benchmark rate unchanged “until at least the summer of 2019”. This statement had a clear dovish impact on financial markets with European fixed income assets rallying strongly.
The ECB also published its updates forecasts on growth and inflation. Growth has been revised downwards from 2.4% to 2.1% in 2018, a more pronounced move than we expected. Inflation expectations were revised upwards at 1.7% in 2018 and 2019, which seems optimistic. The ECB also left its forecast for core inflation this year unchanged at 1.1% but nudging the 2019 forecast higher to 1.6%.
All in all, Mario Draghi’s communication is a success: The ECB announced the end of its QE program without any negative impact of fixed income markets. This is positive in the short-term for European fixed income assets, especially for peripheral countries.