Today the European Central Bank (ECB) met and, as was widely expected, decided to keep policy unchanged. The ECB’s key interest rates – the refinancing rate and the deposit rate – are to remain at 0% and -0.4% respectively. As was announced in June’s meeting, the ECB will continue to wind down its quantitative easing programme. Asset purchases will continue at a rate of EUR 30 billion this month, and then EUR 15 billion in each month of the final quarter. Net asset purchases will stop altogether at the end of the year.

President Mario Draghi had already taken significant steps to define a clear road map for future policy in previous meetings. We already knew that the ECB intended to keep its key interest rates at their current levels “at least through the summer of 2019” and that net asset purchases will stop at the end of the year. It was therefore not surprising that today’s meeting delivered little new news.

EXHIBIT 1: European Central Bank staff macroeconomic projections for the euro area


Source: European Central Bank, J.P. Morgan Asset Management. Data as of 13 September 2018

Draghi noted that the economy remained on a healthy footing, supported by the “ever improving conditions of the labour market.” He highlighted the 9.2 million jobs that have been created in the eurozone since 2013 and the improvement in wage growth that is starting to come through.

The tiny downward revision to the growth forecasts for this year and next were blamed on external factors with a weaker contribution from foreign demand. Draghi flagged the risks to the outlook from weakness in certain emerging markets (EM) and from the ongoing trade conflict emanating from the US. On EM risks, he noted that those countries with better fundamentals haven’t been affected by the troubles that have hit countries with weaker fundamentals. On the trade conflict, he was clear that rising protectionism posed the main threat to the economic outlook. He also emphasised that the latest economic forecasts only factor in the tariff measures that have so far been implemented and not the potential for further escalation.

When asked whether the forecast that inflation will stay at 1.7% over the next two years is consistent with the ECB’s objective of inflation “below, but close to, 2%” Draghi said that it was. Finally, he stated that he saw no need to overshoot 2% inflation despite the protracted period during which inflation has been significantly below target. Most importantly, Draghi noted that the ECB expect “significantly stronger core inflation” supported by wage growth.

In summary, the key message was that loose monetary conditions are still warranted in the coming months but that some normalisation in policy in the second half of next year looks reasonable.