ECB paves way to tapering stimulus plan after leaving rates on hold - as it happened

And that’s a good moment to stop. Thanks for reading and commenting. GW

It’s always interesting to see which press conference clips the ECB choose to plug over twitter....

How longer might the eurozone experience record low interest rates, currently set at zero percent?

Lena Komileva of G+ Economics reckons they could last for at least another year, and possible rather longer.

She writes:

The ECB kept its forward guidance on interest rates and asset purchases, namely that interest rates are expected to remain at their “present levels for an extended period of time, and well past the horizon of our net asset purchases” and that “we stand ready to increase our asset purchase programme in terms of size and/or duration”.

With no changes to the ECB’s policy sequencing (QE vs rates) under discussion, the guidance now means that rates will not be raised until after the end of asset purchases, which is likely to be late 2018 or early 2019 at the earliest.

European stock markets have ended the day higher.

The FTSE 100 gained 0.6%, or 42 points, at 7,398. Germany’s DAX gained 0.67%, while France’s CAC rose by 0.25%.

The euro is bobbing around the $1.20 mark too, up almost one euro cent today, following the news that the ECB has started discussing how to tackle its stimulus programme.

Joshua Mahony of IG says:

Draghi managed to keep the euro gains relatively contained today, with the talk of extremely accommodative policy dampening early gains for the single currency. With Draghi due to set out his stall for how the ECB will embark of its QE tapering in October, the big question is whether tapering will begin in 2017 or 2018.

Marilyn Watson, head of global fundamental fixed income strategy at BlackRock, predicts that the ECB will end its QE programme by next December.

Given the currency bloc’s improving fundamental backdrop and recent impressive data releases, particularly in Germany, not to mention the shortage of supply of bonds to buy, we believe that the ECB will fully taper its asset purchase programme by the end of 2018.

Adrian Hilton, head of global rates and currency at Columbia Threadneedle Investments, says Mario Draghi was more relaxed than some investors expected today:

At its present level, at least, he doesn’t seem to think the euro threatens the medium term inflation objective.”

“As it is, we think this leaves the ECB on track to taper its asset purchases from the start of next year, although we may have to wait until the October meeting – or maybe longer – to see the details. Were the euro to push on towards the 1.25 level versus the dollar, however, the bank may find itself trapped between a disinflationary exchange rate and a need to phase out its QE purchases before it runs out of bonds to buy.”

Mario Draghi’s comments about the euro are significant, says Ranko Berich, Head of Market Analysis at Monex Europe.

“Draghi acknowledged that the euro’s explosive strength this year is a source of uncertainty and worth monitoring.”

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The key message from Mario Draghi’s press conference is that the ECB is getting ready to slow its stimulus programme, but it’s not in a rush.

President Draghi tried to be as vague as possible, while sticking to his pledge to decide the future of its bond-buying programme this autumn.

He confirmed that the governing council had begun ‘very preliminary’ talks about how the quantitative easing programme might be changed; how much longer it might run, and how much it might pump into the euro economy.

This was the key statement from the ECB chief:

“We will announce when we are ready. We think we are going to be ready for much of what we have to decide in October ... if we are not then we postpone.”

Traders have taken this as a sign that QE will be toned down from its current €60bn per month pace from January.

Crucially, Draghi didn’t seem too alarmed by the strength of the euro - claiming at one stage that he didn’t even know where the single currency was trading today (it peaked at $1.2059 during his press conference).

He also stated several times that interest rates will remain at their present record lows for a long time - that’s meant to reassure households and businesses.

7 Sept 201709.58 EDT

Helena Smith

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Meanwhile in Athens, French president Emmanuel Macron has begun talks with Greek prime minister Alexis Tsipras.

In his first hour of official contact with Greece’s head of state, the French leader praised Athens’ austerity reforms and repeated calls for the indebted country to finally be given debt relief.

Meanwhile, anti-austerity groups, including breakaway militants from Tsipras’ Syriza party, have announced they will defy a ban on demonstrations and take to the streets in protest against the mass sell-off of state assets around which much of the visit will focus.

The far leftists, many members of the Popular Unity party, have called the ban - part of draconian security measures in the capital - an insult against “the democratic freedoms of the Greek people and first of all the right of peaceful protest.”

“Popular Unity will not be disciplined by government and police arbitrariness ... Greece is not for sale. Workers are not, and will not, become slaves.”

The demonstration will take place around 6pm local time - ahead of Macron outlining his vision for Europe in a speech from the ancient Pnyx.

Neil Wilson of ETX Capital has helpfully fired over this neat list of the key points from the ECB’s press conference:

• ‘Bulk’ of QE decisions to be taken at October meeting
  
• EZ growth stable and broad based - GDP outlook revised up to 2.2% in 2017, best growth since 2007
  
• Medium-term inflation projections revised lower chiefly due to euro appreciation
  
• Measures of underlying inflation have ticked up but remain at very subdued levels
  
• Broad ‘dissatisfaction’ with inflation, but this is tempered by confidence that inflation will eventually converge with target
  
• Most members reiterated worries about exchange rate pressures first raised by some policymakers at the last meeting
  
• Appreciation of euro has ‘unquestionably’ led to tightening of financial conditions
  
• ECB monitoring euro exchange rate, but doesn’t seem overly concerned about overshoot at present. (Could change if EURUSD hits $1.25?)
  
• Interest rates will remain at present levels well past end of QE finishes; ECB still stands ready to increase the QE programme in terms of size and/or duration
  
• No discussions on scarcity of bonds (seems unlikely), Draghi says ECB has repeatedly shown it can cope with scarcity issue
  
• Draghi keen to stress that patience is needed, wont ‘experiment’ with interest rate forecasts
  
• Draghi reiterated need for structural reforms to be substantially stepped up
  
• ECB not resigned to permanently low inflation, expects convergence with target sooner or later
  
• EURUSD rises above 1.20 handle to retest August’s 2 ½ year highs
  

Wilson adds:

“Mission largely accomplished: Mario Draghi successfully guided the market to expect a tapering announcement in October without sounding hawkish.

And finally, a question from a journalist from German newspaper Frankfurter Allgemeine Sonntagszeitung.

Q: Do you have any information about the negative side effects of the quantitative easing programme that you can share with us?

“The negative side effects of the quantitative easing programme” repeats Draghi slowly, perhaps aghast at the very suggestion that his precious scheme might not be an unmitigated triumph.

We simply don’t see any side-effects, he insists, and any potential side-effects are vastly overwhelmed by the positive effects of the bond-buying scheme.

And that’s the end of the press conference.

Q: What decisions do you think will be taken about your QE stimulus scheme in October?

We discussed a set of different scenarios today, Draghi replies.

They centred on the different lengths and sizes that the bond-buying programme could run at, and the ‘trade offs’ between those two factors.

In other words, the ECB is starting to talk about how much money it might want to pump into the economy from January 2017, and for how much longer it might be needed.

Q: Your inflation forecasts only run up until 2019, but what do you think will happen in 2020?

I expect we will meet all our targets in 2020, smiles Draghi - without mentioning that his term will have expired by then.