UBS: ECB - hawkish decision, dovish guidance

The ECB announced that it will scale back its monthly asset purchases from currently €80bn to €60bn as of April 2017 until December 2017. At first sight, this would have seemed to be a hawkish decision, but ECB President Draghi managed to "package" this decision with dovish commentary:

• The ECB committed to €60bn of asset purchases over the course of nine months, not just six.
• The ECB explicitly left the door open for a return to higher monthly amounts and/or an extension of QE beyond December 2017 if the outlook were to worsen again and/or inflation were still not on track to sustainably return to the ECB's target.
• Mr Draghi said that "tapering" – defined as a gradual reduction in monthly asset purchases towards zero – had not been discussed; he even argued that tapering was "not in sight".
• Mr Draghi stressed that the ECB was committed to maintain an "extraordinary degree of monetary stimulus" and that the Bank will "sustain its presence" in the markets.
• The ECB's new staff macroeconomic forecasts, with a 2019 inflation forecast of just 1.7%, arguably leave the door open for extended stimulus.

"Broad-based consensus" towards reduction to €60bn

Reportedly, the ECB Governing Council discussed two policy options: a six-month extension of monthly asset purchases of €80bn – which was our call – and a ninemonth extension of €60bn. According to Mr Draghi, there was "very broad-based consensus" towards the second option. The ECB President explained that the increase of monthly asset purchases from €60bn to €80bn in March 2016 came against the background of a challenging environment at the time, but that things had stabilised in a way that allowed the ECB to reduce the volume of QE again. He mentioned that markets had proven more resilient to recent political events than many would have anticipated.

New ECB macro forecasts: constructive on growth, cautious on inflation

The ECB's new staff macro forecasts convey a constructive outlook for growth, combined with a muted assessment of the inflation outlook. The 2017 real GDP forecast was increased to 1.7% (up from 1.6%), the projection for 2018 was left at 1.6% and the newly introduced 2019 forecast is also 1.6%. Consumption is projected to hold up well even as oil prices are now drifting higher, partly reflecting the assumption that household savings rates will decline and wages increase. We are more cautious on the growth outlook for domestic demand and growth overall (forecasting GDP growth of 1.3% and 1.2% in 2017 and 2018).

On inflation, the 2017 forecast was raised to 1.3% from 1.2%, but the 2018 forecast was lowered to 1.5% from 1.6% (reflecting a more subdued outlook for core inflation, which was lowered by 0.1pp relative to September, to 1.4%). For 2019, inflation is forecast to be 1.7% and Draghi responded to a question in the press conference that this was not in line with the ECB's definition of price stability.

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