- No new policy signals from a rather uneventful meeting.
- Mario Draghi said the main risks still stem from protectionism/the trade war but this said he is generally at ease with the development on the trade war.
- The market reaction to the meeting was muted.
No news
The decision released at 13:45 CEST contained no major surprises, just like the rest of the press conference (starting 14:30 CEST). To our knowledge, it was the shortest press conference in ECB history, with reporters having no further questions after 25 minutes of questions. On the details, there was a little change in the decision but we attribute this to headline inflation being 2.0% in June.
Growth is perceived to be ‘solid and broad based’, with risks being broadly balanced. Draghi was at ease with the effects of a looming trade war. He also pointed to stabilising survey results, which all in all should be interpreted on the hawkish side.
The ECB was a little more confident on inflation and, in particular, domestic price pressures, which now are not only ‘strengthening’ but ‘strengthening and broadening’. In particular, we find it interesting that Draghi mentioned negotiated wages several times as an underlying component of wage growth. Negotiated wages have recently crept higher and stood at 1.8% in March 2018 (most recent) but country heterogeneity prevails (for example, Germany 2.9% and 1.3%). Other than this, Draghi continued the previous assessment of the inflation outlook.
There were no new signals on the reinvestments to which Draghi said that ‘they didn’t discuss’. That means that we do not have more colour on smoothing the reinvestments (our expectation) or the deviating of the capital key (very unlikely in our view). They did not even discuss when to discuss the change (recall that in June, he said that ‘important decision that we’ll take in the months ahead’). In addition, he gave no further guidance on rates, as the English version ‘at least through the summer of 2019’ prevailed.
Limited market impact
Consequently, markets saw a relatively muted reaction today. In our view, this supports our view that we are currently in a carry-friendly environment.
Specifically for rates, Draghi gave no new colour on the reinvestment policy despite the ‘operation twist’ speculation ahead of the meeting. It could be seen as marginally negative for the long-end of the curve, which has performed in ASW-terms relative to the short end of the curve over the past month. However, in the end, we doubt many market participants had really thought that Draghi would discuss a change in reinvestments today and the impact should be modest. Draghi also clearly underlined that the ‘capital key’ remains the guiding principle. Hence, there is no support for speculation that an ‘operation twist’ could also mean bigger reinvestments in high debt countries at the expense of low-debt countries.
