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Message from the ECB: Enjoy summer!

Today’s Governing Council meeting did little to break the seasonal torpor. We continue to expect its first rate hike to come in September 2019.

There was no change in interest rates or forward guidance at today’s ECB Governing Council meeting.

The Governing Council reaffirmed that bond purchases will end in December and that key interest rates are expected to remain at their present levels “at least through the summer of 2019”.

The ECB said it remained confident about the euro area’s economic outlook and still saw risks to growth as “broadly balanced”.

Trade tensions and the ECB’s bond-reinvestment strategy were the main focus of an unusually short Q&A session.

Overall, there was no significant surprise from today’s press conference. As such, we remain comfortable with our forecast of a first 15bp hike in the deposit facility rate in September 2019, followed by a 25bp hike in all policy rates in December 2019, bringing the deposit rate up to 0%.

There was no change in interest rates or forward guidance at today’s ECB Governing Council meeting. The press release that followed the meeting was broadly the same as the one in June. The ECB lefts its main refinancing, marginal lending facility and deposit rates unchanged at 0.00%, 0.25% and -0.4%, respectively, in line with consensus.

The language on forward guidance was unchanged with the Governing Council stating it expected the key rates to remain at their present levels “at least through the summer of 2019”. There was a slight, but in our view insignificant, change in the phrasing used at the end of today’s press release. In June, ECB finished its forward guidance communication with the statement that rates will remain at their present level “ for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.” This now reads as “for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.” The ECB re-affirmed its intention to end net asset purchases in December, conditional on incoming data.

The Governing Council reaffirmed its confidence in the euro area’s growth prospects, even though there were some phrases hinted at a more hawkish policy stance in the introductory statement such as, “latest economic indicators and surveys results stabilised ”and “uncertainty over the inflation outlook receded”.

The ECB continues to see solid and broad-based growth, with risks to the outlook broadly balanced, even if “uncertainties related to global factors, notably the threat of protectionism, remain prominent”.

Q&A session: focus on reinvestment policy, trade and Greece

On an unusually short Q&A session, there were various questions on reinvestment policies. Draghi said the Governing Council had not discussed reinvestment policy at today’s meeting (not even a discussion on when to start discussing it in the future) and stressed that “the capital key remains our anchor in what we do on reinvestment”, ruling out any flexibility on how the ECB spends reinvestment funds.

Regarding trade, Draghi cautiously welcomed the overnight EU-US trade deal, saying it “was too early to assess the full content of the deal, but stressing that “we took note of this meeting and if one can say something general, it’s a good deal”. With regard to the possibility of including Greek government bonds in the asset purchase programme in the future, Draghi was very clear. The ECB waiver will stop once Greece graduates from the programme this August and GGBs will stop being eligible for ECB operations.

The “true” meaning of “through the summer”

Economists and journalists have been debating on what exactly “through the summer of 2019 ”means, with confusion stemming from the translation of this phrase into other languages. When Draghi was asked to clarify, he said that the “only version is the English version” and made clear that the market pricing and surveys interpretation “appear align very well” with the expectations of the GC. Therefore, Draghi did not specify any possible specific dates (such as September) for a first rate hike.

Overall, no significant surprise emerged from today’s press conference. As such, we remain comfortable with our forecast of a first 15bp hike in the deposit facility rate in September 2019, followed by a 25bp hike in all policy rates in December 2019, bringing the ECB’s deposit rate back up to 0%.
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Nadia Gharbi
Nadia Gharbi is economist at Pictet Wealth Management. She graduates in Université de Genève, Les Acacias, Canton of Geneva, Switzerland Do not hesitate to contact Pictet for an investment proposal. Do not hesitate to contact Pictet for an investment proposal. Please contact Zurich Office, the Geneva Office or one of 26 other offices world-wide.
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