MNI STATE OF PLAY: ECB Draghi Trims QE, Keeps Dovish Stance

By Christian Vits

     FRANKFURT (MNI) - European Central Bank President Mario Draghi on Thursday

outlined the next step to reduce the Bank's E2.3 trillion monetary expansion via

the asset purchasing plan, as an improving economy is starting to open some

space to adjust the extremely loose policy. 

     However, he struck a dovish tone, underlining that the Governing Council

still doesn't see "encouraging" signs in wage growth and inflation. He stressed

that there is still "a large amount of uncertainty" and added that the decision

about the asset-buying plan "is for an open-ended program and it is not going to

stop suddenly."

     The "large majority" of the Governing Council expressed its preference to

keep it open-ended, he said and acknowledged that "a few" members argued in

favour of an intended end date for balance sheet expansion.

     Starting in January next year, the ECB will halve the current monthly

amount to E30 billion, with purchases announced until the end of September 2018

"or beyond, if necessary, and in any case until the Governing Council sees a

sustained adjustment in the path of inflation consistent with its inflation

aim," Draghi said. 

     The size and scope of the extension was widely expected among observers.

The main interest rates were kept on hold.

     As in the past, the Eurosystem will reinvest the principal payments from

maturing securities purchased under the APP for an extended period of time after

the end of its net asset purchases, and "in any case for as long as necessary."

Draghi noted that the reinvestments are "becoming more and more important."

     The recalibration of the ECB's program "reflects growing confidence in the

gradual convergence of inflation rates towards our inflation aim, on account of

the increasingly robust and broad-based economic expansion, an an uptick in

measures of underlying inflation" and the pass-through of policy measures to the

financing conditions, Draghi said.

     He twice mentioned an "unabated growth momentum" in the second half of this

year and added that the risks surrounding the euro area growth outlook "remain

broadly balanced".

     Foreign exchange rate volatility seems to be a lesser worry at the moment

as it was mentioned among the risks but not discussed in the Q&A session.

     With regard to inflation, the ECB expects it to average 1.5% in 2017, 1.2%

in 2018 and 1.5% in 2019, under the bank's target of "below but close to two

percent". Compared with the previous projection in June, the price outlook has

been revised down slightly in September.

     Draghi maintained the wording that the ECB stands ready to increase the

asset purchase program "in terms of size and/or duration" if the outlook becomes

less favourable, or financial conditions hinder an increase of inflation towards

the ECB's target of "below but close to" two percent.

     Asked whether a more favourable economic development could trigger a

decrease in size and duration of the asset purchase program, Draghi said the

decision was based on the information currently available, but stressed that the

Council "does not foresee any changes".

     Even though financial markets were given something very close to consensus,

the German Bund yield quickly fell two basis points to 0.445 percent, the yield

curve flattened slightly and Italian debt outperformed. Draghi described the

market reaction as "pretty muted".

     "Today's decision is the first real baby step towards a very gentle exit

from the ECB's crisis mode, but it is definitely not a big-bang U-turn," Carsten

Brzeski, ING Chief Economist Germany and Austria, wrote. "In fact, the QE

recalibration illustrates the ECB wants to start the exit as cautiously as

possible, ideally without seeing the euro appreciate or bond yields increase. "

     Draghi also tried to downplay concerns that the ECB could face a situation

where its firepower is limited, due to the scarcity of assets and the 33% issuer

limit. "Our program is flexible enough that we can adjust," said.

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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