ECB: dovish tone seems likely to prevail - Lloyds

Today the European Central Bank left interest rates and the purchase program unchanged, as expected. Analysts from Lloyds Bank point out that the dovish dominates so far the central bank. 

Key Quotes: 

“Given that the ECB only modified its QE programme last month, it was no surprise that policy was left unchanged. The dovish tone of the statement was also in line with our expectations, as it is far too soon for the majority of policymakers to contemplate ‘tapering’ asset purchases, meaning moving decisively towards zero. While euro area economic activity remains resilient and headline inflation has risen to a 3-year high, President Draghi highlighted that underlying domestic price inflation pressures remain subdued and that risks to the growth outlook remains ‘tilted to the downside’. These explain the continuation of monetary stimulus this year.”

“During the Q&A, Mr Draghi kept schtum on a number of topics, including ‘Brexit’, US President-elect Trump, prospects for tapering, Italy’s banking sector and whether the composition of asset purchases will change from April. He did say that deflation risks have ‘largely disappeared’ – a nod to the more hawkish members – and that the ECB will be watching second-round effects of the rise in headline inflation very closely.”

“The ECB also announced that purchases of assets below the deposit rate, as agreed last month, will apply only to the public sector assets and priority will be given to assets above the deposit rate.”

“New economic forecasts will be available at the next meeting on 9 March, which will provide an opportunity to reassess the current policy stance. Our central forecast is for the ECB to starting winding down its QE programme in 2018, which would be positive for the euro, but in our view this is not likely to be contemplated until the second half of this year at the earliest. Hence, for now, a dovish tone seems likely to prevail.”