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Draghi’s Clear Commentary

6 April 2017 by Mark Holman

There has been a bit of uncertainty around recent ECB communications on rate policy and how the policy interacts with the purchase programmes, and this morning Mario Draghi sought to clear this up in a speech from the ECB’s headquarters in Frankfurt.

Some key points from Mr Draghi:

  • There has not been sufficient evidence to materially alter the ECB’s inflation outlook.
  • The inflation forecast remains conditional on a very substantial degree of monetary accommodation.
  • Interest rates will remain at present level or lower levels for an extended period of time.
  • That this would be “well past the period of asset purchases”.

This categorically means no hike in rates this year as the purchase programmes will run to at least December 31st 2017.

What Draghi did not say was how the asset purchase programme will evolve, or give any hint as to when it might end. We do know though that tapering is now officially underway as since April 1st the ECB will only buy €60bn a month and not the previous €80bn per month.

Our view is that the programme will in fact go beyond 2017, but most likely around the September meeting, Draghi will taper the purchase amounts again, down to €40bn per month. We doubt that he will use the word ‘taper’ though!

So far ‘operation taper’ has been successful for Mr. Draghi and we must take our hats off to the ECB for negotiating this very tricky passage without market disruption. Having said that though, parts of the European fixed income markets remain almost priced to a perfect exit from the programmes, which is something we remain highly sceptical about.

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