Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we have conducted a thorough assessment of the economic and inflation outlook, also taking into account the latest staff macroeconomic projections for the euro area. As a result, the Governing Council took the following decisions in the pursuit of its price stability objective.
First, we decided to keep the key ECB interest rates unchanged. We now expect them to remain at their present levels at least through the end of 2019, and in any case 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.
Second, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Third, we decided to launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III), starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy. Under TLTRO-III, counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation. Like the outstanding TLTRO programme, TLTRO‑III will feature built-in incentives for credit conditions to remain favourable. Further details on the precise terms of TLTRO-III will be communicated in due course.
Fourth, we will continue conducting our lending operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021.
Today’s monetary policy decisions were taken to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium term. While there are signs that some of the idiosyncratic domestic factors dampening growth are starting to fade, the weakening in economic data points to a sizeable moderation in the pace of the economic expansion that will extend into the current year. The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment. Moreover, underlying inflation continues to be muted. The weaker economic momentum is slowing the adjustment of inflation towards our aim. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. Today’s decisions will support the further build-up of domestic price pressures and headline inflation developments over the medium term. Significant monetary policy stimulus will continue to be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets and the new series of TLTROs. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the fourth quarter of 2018, following growth of 0.1% in the third quarter. Incoming data have continued to be weak, in particular in the manufacturing sector, reflecting the slowdown in external demand compounded by some country and sector-specific factors. The impact of these factors is turning out to be somewhat longer-lasting, which suggests that the near-term growth outlook will be weaker than previously anticipated. Looking ahead, the effect of these adverse factors is expected to unwind. The euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, and the ongoing – albeit somewhat slower – expansion in global activity.
This assessment is broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down substantially in 2019 and slightly in 2020.
The risks surrounding the euro area growth outlook are still tilted to the downside, on account ofthe persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.5% in February 2019, after 1.4% in January, reflecting somewhat higher energy and food price inflation. On the basis of current futures prices for oil, headline inflation is likely to remain at around current levels before declining towards the end of year. Measures of underlying inflation remain generally muted, but labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
This assessment is also broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down across the projection horizon, reflecting in particular the more subdued near-term growth outlook.
Turning to the monetary analysis, broad money (M3) growth decreased to 3.8% in January 2019, from 4.1% in December 2018. M3 growth continues to be backed by bank credit creation, notwithstanding a recent moderation in credit dynamics. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The annual growth rate of loans to non-financial corporations declined to 3.3% in January 2019, from 3.9% in December 2018, reflecting a base effect but also, in some countries, the typical lagged reaction to the slowdown in economic activity, while the annual growth rate of loans to households remained at 3.2%. Borrowing conditions for firms and households are still favourable, as the monetary policy measures put in place since June 2014 continue to support access to financing, in particular for small and medium-sized enterprises. The policy measures decided today, and in particular the new series of TLTROs, will help to ensure that bank lending conditions remain favourable going forward.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. This is particularly important in view of the overall limited implementation of the 2018 country-specific recommendations, as recently communicated by the European Commission. Regarding fiscal policies, the mildly expansionary euro area fiscal stance and the operation of automatic stabilisers are providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should continue to increase efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
Entering into US session, European majors are the weakest ones today. Euro dips notably after ECB left interest rate unchanged and revised forward guidance. It will now keep interest rates at present level through the end of 2019, prolonged from summer of 2019. Also a new round of quarterly TLTRO-III is announced. These are actually not surprising given the deterioration in Eurozone outlook. Focus will turn to ECB President Mario Draghi’s press conference and new economic projections. Sterling in the currency markets, Sterling is the weakest as there is sign of any breakthrough in Irish backstop impasse. Commodity currencies are generally higher even though outlook for BoC, RBA and RBNZ are all dovish.
In Europe, currently:
FTSE is down -0.29%.
DAX is down -0.19%.
CAC is down -0.06%.
German 10-year yield is down -0.0165 at 0.113, heading back to 0.1 handle.
Earlier in Asia:
Nikkei dropped -0.65%.
Hong Kong HSI dropped -0.89%.
China Shanghai SSE rose 0.14%.
Singapore Strait Times rose 0.21%.
Japan 10-year JGB yield dropped -0.0062 to -0.001.
ECB keeps interest range unchanged at 0.00% as widely expected. The central bank now expects to keep interest rates at present levels “at least through the end of 2019”, prolonged from “summer of 2019”.
Also, TLTRO-III is announced, quarterly from September 2019 through March 2021. It’s aiming at preserving favourable bank lending conditions, and smooth transition of monetary policy.
Euro weakens after the release, taking Sterling and Swiss lower too. Focus will now turn to ECB President Mario Draghi’s press conference and new economic projections.
Here is the full statement:
Monetary Policy Decisions
At today’s meeting the Governing Council of the European Central Bank (ECB) took the following monetary policy decisions:
(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case 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.
(2) The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
(3) A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy. Under TLTRO-III, counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation. Like the outstanding TLTRO programme, TLTRO-III will feature built-in incentives for credit conditions to remain favourable. Further details on the precise terms of TLTRO-III will be communicated in due course.
(4) The Eurosystem’s lending operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
BoE MPC member Silvanna Tenreyo said the “effect of that Brexit uncertainty on demand has become increasingly evident in recent months”. The effect is most apparent in business as “investment has been falling in the UK at a time when it has been growing in our international peers; business confidence surveys have slumped; hiring intentions have fallen back.”.
There were also signs of impact on households as “housing market is weakening; consumer confidence has deteriorated. This all happened at a time when household real incomes are rising and all else equal, one might normally have expected spending to be rising too.”
On monetary policy in case of disorderly Brexit in a speech. She echoed the view that seems to be the consensus in the MPC now. That is, “a situation where the negative demand effects outweigh those other effects is more likely, which would necessitate a loosening in policy.”
But she also noted reiterated that “the monetary policy response to such a scenario will depend on the balance of these effects on supply, demand and the exchange rate”. And, it is “to envisage other plausible scenarios requiring the opposite response.”
More from Chancellor of the Exchequer Philip Hammond. He told BBC radio that “The government is very clear where the will of parliament is on this. Parliament will vote not to leave the European Union without a deal,” and he had “a high degree of confidence about that.”
At the same time, he also warned that voting against Prime Minister Theresa May’s deal, the UK “will then be in unknown territory where a consensus will have to be forged across the House of Commons and that will inevitably mean compromises being made.”
Eurozone Q4 GDP growth was finalized at 0.2% qoq, unrevised. Annually, GDP grew 1.1% yoy. Over the whole 2018, GDP grew 1.8%. During Q4, household final consumption expenditure rose by 0.2%. Gross fixed capital formation increased by 0.6%. Exports increased by 0.9%. Imports increased by 0.5%. Eurozone Employment growth in Q4 was finalized at 0.3% qoq, 1.3% yoy.
UK Chancellor of Exchequer Philip Hammond warned today “if we don’t pass the meaningful vote on Tuesday we’ll go into a parliamentary process that very likely will lead to an extension of time and an uncertain outcome, more uncertainty for the British economy, more uncertainty for people across the country”.
And he urged “it’s very important that my colleagues think about the consequences of not agreeing this deal. This is now the last chance to be confident that we can get this deal done and we can leave the EU on schedule.”
The UK parliament is scheduled to have another Brexit deal meaningful vote on March 12. If it’s rejected, there will be a vote on no-deal Brexit on March 13. Then if both are rejected, there will be a vote on Article 50 extension.
China plans to cut around CNY 2T in taxes and fees for companies in 2019 as growth could slow to the lowest pace in three decades at 6.0-6.5%. Yet, its Finance Minister Liu Kun warned that “considering the downward pressure on the economy and the upcoming policy of larger tax and fee cuts, some regions will still face relatively big budgetary pressure this year.”
Budget deficit is targeted to be at 2.8% of GDP, up from 2.6% in 2018. Liu said “the arrangement on the budget deficit ratio has fully considered factors including fiscal revenue and local government special bonds and leaves more policy room for future macro adjustments.” To offset the reduction in tax and fee revenue, Liu noted the government will collect more profits from some state-owned financial institutions and companies. The government is also trying to secure funding via other channels “which allows us not to raise the deficit ratio too high.”
ECB rate decision and press conference will be the major focus today. No change in monetary policy is expected. The key interest rate should be held at 0.00%, with marginal lending facility rate at 0.25% and deposit facility rate at -0.40% respectively.
Since Q4 last year, economic outlook in Eurozone deteriorated and data released since January revealed little improvements. OECD downgraded Eurozone growth forecasts sharply lower from 1.8% in 2019 to just 1.0%. Most notably, Germany growth forecast was downgraded from 1.6% to just 0.7% in 2019. Italy is projected to contract -0.2% in 2019, revised down from 0.9% growth. There is a large chance for ECB to revised down both growth and inflation forecasts in the new staff projections to be published today.
On forward guidance, ECB adopted the stance that interest rates will remain at present level “at least through the summer of 2019”. There is a chance for ECB to extend the duration to at least “through the end of 2019” without losing flexibility nor precision. It’s good timing to do so with new economic projections. On new TLTROs, comments from ECB officials appear to suggests that they’re still in discussion. thus, it’s unlikely to have any formal announcement today.
Australia trade surplus widened to AUD 4.55B in January, up from AUD 3.77B and beat expectation of AUD 2.90B. That’s also the second largest surplus on record. Exports rose 5% to AUD 1.90B while imports rose 3% to AUD 1.12B.
However, retail sales was disappointing. Sales grew merely 0.1% mom in January, rebounding from -0.4% decline in prior month, but missed expectation of 0.3% mom.
Also from Australia, AiG Performance of Construction index rose 0.7 to 43.8 in February, indicating a slower rate of contraction.
In the Beige Book economic report, Fed noted that “economic activity continued to expand in late January and February”. 10 out of 12 districts reported “slight-to-moderate” growth, except Philadelphia and St. Louis, which were flat.
About half of districts said “government shutdown had led to slower economic activity in some sectors”, including retail, auto sales, tourism, real estate, restaurants, manufacturing, and staffing services.” Numerous manufacturing contacts expressed concerns on ” weakening global demand, higher costs due to tariffs, and ongoing trade policy uncertainty”.
Employment increased in most districts, with “modest-to-moderate” gains in a majority. Wages continued to increased, with a majority reported “moderately higher wages”. Price continued to increased at a “modest-to-moderate pace”. A few districts reported “upward price pressures from tariffs”. But several districts noted that steel prices had “stabilized or fallen recently”.
It’s less than a week from March 12 when another meaningful vote on Brexit deal could be held in the UK Parliament. But Bloomberg reported that positions on both sides are hardening rather than converging. Both the UK and EU are counting on the other to back down. EU officials are pessimistic about the chance of any breakthrough this week.
In particular, unnamed EU officials described the talks with UK Attorney General Geoffrey Cox earlier this week as some of the worst-tempered of the two-year process. Meanwhile, what Cox requested, independent arbitration of the contentious Irish backstop arrangement outside of European Court of Justice, was seen as unacceptable for the EU.
Ted McKinney, Undersecretary for Trade and Foreign Agriculture Services, said US-China trade talks are going well. And, “presently there’s a lot of discussions going on by digital video conference, also a very good and productive thing”. Meanwhile, there’s just a lot of work in getting words down … a contract or agreement, and that’s the current status”.
Trump said in the Oval Office that trade negotiations with China are “moving along well”, “very nicely”. But he added that “there would either be “a good deal or it’s not going to be a deal”.
Canadian Dollar dives sharply after BoC kept interest rate unchanged at 1.75% and turned more cautious. A rate hike should be at least off the table temporarily.
The most important change in the statement is in the last paragraph. BoC now said the outlook “continues to warrant a policy interest that is below its neutral range”. And, given the mixed data, “it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook”. Also, with “increased uncertainty” about timing of future hikes, BoC will closely watch developments in household spending, oil and trade.
Also from Canada, Ivey PMI dropped sharply to 50.6 in February, down from 54.7 and way below expectation of 55.1. Trade deficit widened to CAD -4.6B in December versus expectation of CAD -1.7B. Labor productivity dropped -0.4% qoq in Q4.
Here is the full statement:
Bank of Canada maintains overnight rate target at 1 ¾ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.
Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR). While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.
Many central banks have acknowledged the building headwinds to growth, and financial conditions have eased as a result. Meanwhile, progress in US-China trade talks and policy stimulus in China have improved market sentiment and contributed to firmer commodity prices.
For Canada, the Bank was projecting a temporary slowdown in late 2018 and early 2019, mainly because of last year’s drop in oil prices. The Bank had forecast weak exports and investment in the energy sector and a decline in household spending in oil-producing provinces. However, the slowdown in the fourth quarter was sharper and more broadly based. Consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations. After growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.
Core inflation measures remain close to 2 per cent. CPI inflation eased to 1.4 per cent in January, largely because of lower gasoline prices. The Bank expects CPI inflation to be slightly below the 2 per cent target through most of 2019, reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.
Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range. Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.
Information note
The next scheduled date for announcing the overnight rate target is April 24, 2019. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.
The financial markets are rather quiet in European session. Chinese stocks extended recent strong rally with Shanghai SSE regained 3100 handle. But optimism was not much shared by investors elsewhere. Both Asian and European markets are mixed in general.
In the currency markets, Australian Dollar remains the weakest one for today as traders increased bet on RBA rate cut this year after dismal Q4 GDP. Sterling is the second weakest as there is no breakthrough on Irish backstop while next week’s crucial Brexit votes are approaching. Yen and Dollar are the strongest ones for today. OECD’s downgrade of global growth forecast is largely ignored.
Over the week, the picture is similar, with Yen and Dollar beings strongest. Aussie is the weakest one. Canadian Dollar follows as traders now await BoC rate decision. Recent economic data from Canada pointed to slowdown in growth momentum. Yet BoC Governor Stephen Poloz maintained tightening bias in recent comments. There is risk of a mild dovish twist in today’s BoC statement. If that happens, the Loonie will likely suffer another round of selling. Also WTI crude oil stabilizes at around 56 for the moment but looks vulnerable.
Also to be released include Canada trade balance, labor productivity and Ivey PMI. US will release ADP employment, trade balance, crude oil inventories and Fed’s Beige Book.
In Europe, currently:
FTSE is up 0.32%.
DAX is down -0.25%.
CAC is down -0.15%.
German 10-year yield is down -0.024 at 0.146.
Earlier in Asia:
Nikkei dropped -0.60%.
Hong Kong HSI rose 0.26%.
China Shanghai SSE rose 1.57%.
Singapore Strait Times dropped -0.35%.
Japan 10-year JGB yield dropped -0.0132 to -0.005, turned negative.
OECD lowered global growth forecast by -0.2% to 3.3% in 2019 and by -0.1% to 3.4% in 2020. G20 growth forecast was lowered by -0.2% to 3.5% in 2019, and kept unchanged at 3.7% in 2020.
In the Interim Economic Outlook, it’s noted that Chinese and European slowdown, and weakening global trade growth are the principal factors weighing on the world economy. Also, OECD warned that further trade restrictions and policy uncertainty could bring “additional adverse effects”. For China, while policy stimulus should offset weak trade development, “risks remains of a sharper slowdown” that would hit global growth and trade.
“The global economy is facing increasingly serious headwinds,” said OECD Chief Economist Laurence Boone. “A sharper slowdown in any of the major regions could derail activity worldwide, especially if it spills over to financial markets. Governments should intensify multilateral dialogue to limit risks and coordinate policy actions to avoid a further downturn,” Ms Boone said.
Here are some details:
World growth forecast is lowered from 3.5% to 3.3% in 2019.
World growth forecast is lowed from 3.5% to 3.4% in 2020.
G20 growth forecast is lowered from 3.7% to 3.5% in 2019.
G20 growth forecast is unchanged at 3.7% in 2020.
US growth forecast is lowered from 2.7% to 3.6% in 2019.
US growth forecast is raised from 2.1% to 2.2% in 2020.
Eurozone growth forecast is lowered from 1.8% to 1.0% in 2019.
Eurozone growth forecast is lowered from 1.6% to 1.2% in 2020.
UK growth forecast is lowered from 1.4% to 0.8% in 2019.
UK growth forecast is lowered from 1.1% to 0.9% in 2020.
Japan growth forecast is lowered from 1.0% to 0.8% in 2019.
Japan growth forecast is unchanged at 0.7% in 2020.
China growth forecast is lowered from 6.3% to 6.2% in 2019.
China growth forecast is unchanged at 6.0% in 2020.
UK Attorney General Geoffrey Cox talked about his meeting with EU in Brussels yesterday. He told Sky News that “we’ve put forward some proposals, they’re very reasonable proposals, and we’re now really into the detail of the discussions,” regarding the changes needed on Irish backstop. Cox added that “both sides have exchanged robust, strong views and we’re now facing the real discussions, talks will be resuming soon.”
European Commission spokesman Margaritis Schinas said chief Brexit negotiator Michel Barnier has informed the Commission that “while the talks take place in a constructive atmosphere, discussions have been difficult.” Also, “no solution has been identified at this point that is consistent with the Withdrawal Agreement, including the protocol on Ireland and Northern Ireland, which will not be reopened,”
Separately, UK Trade Minister Liam Fox said the government will laid out the tariffs it plans to levy if the parliament chooses a no-deal Brexit. Fox personally prefer to present the tariff plan to MPs before no-deal vote next week. But he said it was not his decision to make.
Here is an update on our position trading strategy last updated in the weekly report. To recap, we maintained our bearish view on Aussie, but we’re not convinced regarding Yen’s strength. Therefore, we decided to switch from AUD/JPY short to AUD/USD this week. The AUD/JPY short (entered at 78.40) was closed at 79.50 at weekly open, with 110 pips loss.
AUD/USD’s is entered today on break of 0.7050. Today’s break of 0.7054 support should confirm completion of rebound from 0.6722 at 0.7295.
AUD/USD is staying inside medium term falling channel and failed to sustain above falling 55 day EMA. Both affirmed our bearish view. Further decline should be seen back to retest 0.6722 low in near term.
In the larger picture, the corrective rise from 0.6826 (2016 low) completed at 0.8135 after rejection by 55 month EMA. The dive to 0.6722 was a result of the currency flash crash earlier this year. Thus, AUD/USD couldn’t sustain below 0.6826 low at that time. But we’d anticipate a firm break of 0.6722/6826 zone with the current fall to resume the long term down trend from 1.1079 to 0.6008 and below.
To conclude, we’ll hold short in AUD/USD, with stop at 0.7125 first to give it some breathing room. 0.6722 is the first target and we’ll assess the reaction from this level to decide whether to exit. But we’re tentatively looking at 0.6008 as the point to close the trade.
Entering into European session, Australian Dollar is the weakest one for today, followed by New Zealand Dollar. The Aussie is weighed down by much weaker than expected Q4 GDP growth, at 0.2% qoq. Australian Treasurer Josh Frydenberg attributed the slowdown to drought. RBA Governor Philip Lowe also maintained upbeat view on the outlook. But today’s data further affirm market expectations that the next move is a cut, and could happen as soon as in August.
Sterling is the third weakest as there was no UK Attorney General Geoffrey Cox’s trip to Brussels produced no breakthrough on Irish backstop. Yen, Dollar and Swiss are the strongest ones. Looking ahead, the European session is relatively empty today. BoE Cunliffe’s speech may catch some attention. Focus will mainly be on BoC rate decision and US ADP employment.
In Asia:
Nikkei closed down -0.60%.
Hong Kong HSI is up 0.19%.
China Shanghai SSE is up 0.33%.
Singapore Strait Times is up 0.01%.
Japan 10-year JGB yield is down -0.0134 at -0.005, turned negative again.
BoJ board member Yutaka Harada warned that the economy is facing increasing risks, including slowdown in China, trade tensions and weak private consumptions. Also, subdued inflation could reinforce the public view of low inflation, which would delay the achievement of the 2% target. He urged that “if the economy deteriorates to the extent that achieving the inflation target in the long term becomes difficult, it’s necessary to strengthen monetary easing without delay.”
For now, Harada said BOJ should commit to loose monetary policy “unless prices show stronger movements than currently anticipated.” And the conduct of monetary policy should be “data-dependent, not calendar-based”. He also warned that “past episodes of premature monetary tightening worsened the economy, driven down prices and output, and led to declines in interest rates in the longer-term.”
ECB press conference live stream
By loading the video, you agree to YouTube’s privacy policy.
Learn more
Load video
INTRODUCTORY STATEMENT
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we have conducted a thorough assessment of the economic and inflation outlook, also taking into account the latest staff macroeconomic projections for the euro area. As a result, the Governing Council took the following decisions in the pursuit of its price stability objective.
First, we decided to keep the key ECB interest rates unchanged. We now expect them to remain at their present levels at least through the end of 2019, and in any case 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.
Second, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Third, we decided to launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III), starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy. Under TLTRO-III, counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation. Like the outstanding TLTRO programme, TLTRO‑III will feature built-in incentives for credit conditions to remain favourable. Further details on the precise terms of TLTRO-III will be communicated in due course.
Fourth, we will continue conducting our lending operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021.
Today’s monetary policy decisions were taken to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium term. While there are signs that some of the idiosyncratic domestic factors dampening growth are starting to fade, the weakening in economic data points to a sizeable moderation in the pace of the economic expansion that will extend into the current year. The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment. Moreover, underlying inflation continues to be muted. The weaker economic momentum is slowing the adjustment of inflation towards our aim. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. Today’s decisions will support the further build-up of domestic price pressures and headline inflation developments over the medium term. Significant monetary policy stimulus will continue to be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets and the new series of TLTROs. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the fourth quarter of 2018, following growth of 0.1% in the third quarter. Incoming data have continued to be weak, in particular in the manufacturing sector, reflecting the slowdown in external demand compounded by some country and sector-specific factors. The impact of these factors is turning out to be somewhat longer-lasting, which suggests that the near-term growth outlook will be weaker than previously anticipated. Looking ahead, the effect of these adverse factors is expected to unwind. The euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, and the ongoing – albeit somewhat slower – expansion in global activity.
This assessment is broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.1% in 2019, 1.6% in 2020 and 1.5% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down substantially in 2019 and slightly in 2020.
The risks surrounding the euro area growth outlook are still tilted to the downside, on account ofthe persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.5% in February 2019, after 1.4% in January, reflecting somewhat higher energy and food price inflation. On the basis of current futures prices for oil, headline inflation is likely to remain at around current levels before declining towards the end of year. Measures of underlying inflation remain generally muted, but labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
This assessment is also broadly reflected in the March 2019 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.5% in 2020 and 1.6% in 2021. Compared with the December 2018 Eurosystem staff macroeconomic projections, the outlook for HICP inflation has been revised down across the projection horizon, reflecting in particular the more subdued near-term growth outlook.
Turning to the monetary analysis, broad money (M3) growth decreased to 3.8% in January 2019, from 4.1% in December 2018. M3 growth continues to be backed by bank credit creation, notwithstanding a recent moderation in credit dynamics. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The annual growth rate of loans to non-financial corporations declined to 3.3% in January 2019, from 3.9% in December 2018, reflecting a base effect but also, in some countries, the typical lagged reaction to the slowdown in economic activity, while the annual growth rate of loans to households remained at 3.2%. Borrowing conditions for firms and households are still favourable, as the monetary policy measures put in place since June 2014 continue to support access to financing, in particular for small and medium-sized enterprises. The policy measures decided today, and in particular the new series of TLTROs, will help to ensure that bank lending conditions remain favourable going forward.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. This is particularly important in view of the overall limited implementation of the 2018 country-specific recommendations, as recently communicated by the European Commission. Regarding fiscal policies, the mildly expansionary euro area fiscal stance and the operation of automatic stabilisers are providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should continue to increase efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
We are now at your disposal for questions.