FXStreet (Guatemala) – Analysts at Rabobank noted the day’s key event in the ECB and headline details there of.
Key Quotes:
“In his opening statement, Draghi said that “renewed downside risks have emerged to the outlook for growth and inflation”, but “owing to sharp fluctuations in financial and commodity markets, the Governing Council judged it premature to conclude on whether these developments could have a lasting impact […] or whether they should be considered to be mainly transitory.” That struggle was highlighted by Draghi’s comment in the Q&A that “the consequences of a lower price are positive, unambiguously, if there are no second round effects. When oil is lower because of demand effects, we also have to consider the impact of lower demand from emerging markets on the Eurozone.”
Draghi presented a significant downward revision to the growth projections to back up his dovish comments. Growth is now seen at 1.4% this year and 1.7% next year (very close to our own forecasts). This compares to 1.5% and 1.7% respectively in the previous forecast round. That the growth forecast for 2017 was also reduced by 0.2%-points (to 1.8%) may reflect the ECB’s concerns that the weakness in emerging markets is “unlikely to be quickly reversed.”
On the whole, therefore, it was clear that the Governing Council are leaning towards a more negative judgement (i.e., weakness in EM’s being of a more permanent nature and their negative effects outstripping the positive impact of lower commodity prices), but they are hoping to gain more visibility in due course to decide whether further action is appropriate (a reference by Draghi to the upcoming G20 meeting in Ankara was notable in that respect).
As expected, there were even more sizeable downward revisions to the inflation projections, with the 2015 forecast cut by 0.2%-points to 0.1% and the 2016 forecast by 0.4%-points to 1.1%. The 2018 forecast was reduced one notch to 1.7% as the rise in inflation was “expected to materialize somewhat more slowly than before.” In our view the latter is probably only just shy from the level the Council would judge as inconsistent with their medium-term price stability target.
As such, we would envisage the ECB to start preparing discussions about their next steps, but without yet communicating this to the markets as they may still have sufficient confidence that current policy measures are working their way through the system (indeed, this was highlighted by Draghi again today) and that the recent tightening in financial conditions may ‘blow over’. Should we see significantly weaker economic indicators as the ECB head into their next policy meeting in October, we would expect the ECB to start that discussion in a more open way.”
(Market News Provided by FXstreet)