The ECB kept policy rates and its QE programme unchanged but changed forward guidance on policy rates as it no longer expects these to go to 'lower levels'. Regarding the QE purchases the ECB continued to have an easing bias as it communicated that it stands ready to increase QE in terms of size and/or duration.
According to President Mario Draghi, the ECB changed its forward guidance on policy rates as the deflation risks have disappeared. However, this was despite the ECB revising its inflation projection lower throughout its entire forecast horizon.
The reduced deflation risk should instead mainly reflect a stronger economic outlook. The ECB now characterises the risks to the economic outlook as 'broadly balanced' but Draghi again emphasised that the economic expansion has to feed through to prices.
Crucially, Draghi said underlying inflation is expected to stay where it is. Related to this, the ECB revised its core inflation projections slightly lower for 2018 and 2019 but in our view, the ECB is still too optimistic in its core inflation projection and further downward revisions should warrant a continuation of the accommodative monetary policy.
We still expect the ECB to continue its QE programme next year but to reduce its purchases to EUR40bn per month starting from January 2018 and continuing for at least six months. In our view, it is still premature to discuss rate hikes from the ECB.
We do not see today's ECB meeting as a prelude to a major sell-off in the European fixed income market despite the removal of "or lower" from the introductory statement and the upward revisions to the growth forecasts. In our view Draghi today managed to convince the market that inflation is still 'the only' mandate for the ECB.
It was down and back again for EUR/USD following today's meeting with the cross briefly dipping below 1.12 but now back in the 1.1220 area . The hawkish amendments in the statement were indeed balanced by the significant downward revisions to inflation, suggesting to the FX market that rate hikes are still very far off. Today's message from the ECB is not in our view going to be a key catalyst for further EUR/USD upside.
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