Draghi talked but said little new. As the leaks suggested, the calibration of the asset purchases will be announced next month. However, Draghi left no doubt that substantial accommodation is still judged necessary, indicating that the bond buying program will be extended into next year, though the amount remains unspecified.
The ECB President was clear that despite the solid and broad based growth, price pressures remain subdued and are not yet on a self-sustaining and convincing uptrend. This also reinforces ideas that the ECB’s balance sheet is going to continue expanding.
The ECB staff forecasts were in line with the leaks. The growth forecasts were tweaked slightly higher and inflation a tad lower. Growth this year was revised to 2.2% from 1.9%. This reflects the stronger than expected performance in H1. The GDP forecast for 2018 and 2019 was left unchanged at 1.6% and 1.7% respectively. The CPI forecasts were revised lower, mostly due to exchange rate appreciation. For this year, headline inflation is expected to be 1.5%, down from 1.6% in June. Next year’s forecast was trimmed to 1.2% from 1.3%. Inflation in 2019 is expected to be at 1.5% rather than 1.6%.
On the currency, Draghi noted up front that the volatility was a source of uncertainty. He did acknowledge that the euro’s appreciation may dampen exports. He reiterated the mantra that the ECB does not target the currency but that the exchange rate is important for growth and inflation expectations. The discussion, Draghi said, was over how much the euro appreciation is due to exogenous factors and how much is a function of EMU performance.
The length and size of the asset purchases were discussed. Draghi characterized the discussion as were preliminary and that changing the country and security limit was not discussed. Nor was the sequence, which is to say that rates will remain low until well after the asset purchases cease.
The euro rallied to approach but not yet taken out the high make in late August near $1.2070. Our next technical objective is near $1.2165, the 50% retracement of the euro’s decline that began in mid-2014.