October 27, 2017

News in Charts: ECB: rate rises still a distant prospect

by Fathom Consulting

Following the October monetary policy meeting, President Draghi announced the future of the ECB’s quantitative easing programme. The asset purchase programme will continue until September 2018 (nine months longer than previously announced), however the monthly purchase target will decrease from €60 billion to €30 billion – slightly less than Fathom’s expectations. Both the main refinancing rate and the deposit facility rate remained unchanged at 0.0% and -0.4% respectively.

President Draghi stressed that the reduced rate of purchases should not be described as tapering and he left the door open for the ECB to extend, or even enlarge, the programme should the Governing Council not see a “sustained adjustment in the path of inflation”. The ECB was keen to avoid comparisons with the Federal Reserve’s monetary policy tightening, stating that the US is at a much more advanced stage of its business cycle.

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Although price pressures have strengthened over the last year, headline inflation remains comfortably below the target of 2.0%, while core inflation (which excluded the most volatile components in the headline index) has only breached 1.2% once in four years. Fathom does not forecast headline inflation returning to target in the near future.

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Substantial output gaps remain in a number of euro area countries, as highlighted in Fathom’s recent Global Economic and Markets Outlook. Given the large amount of economic slack in these countries and with inflation remaining below target, the ECB likely views reduced asset purchases as a sufficient tightening in the policy stance for the near future. Consequently, Fathom forecasts the deposit facility rate to remain negative until 2019 at the earliest.

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