Daily Insight ECB officials signal action
Group Economics Macro & Financial Markets Research Nick Kounis & Maritza Cabezas +31 20 343 5616
16 October 2015 • • •
ECB officials signal increasing need for additional easing, pulling EUR/USD down from highs We continue to expect increase and extension of ECB QE before year end Fed’s Dudley says economy is slowing, and brings forward arguments for rate hike delay
Dovish commentary from ECB officials hurts euro
EUR/USD and oil price verses ECB assumptions
ECB officials stepped up their dovish rhetoric on Thursday,
USD per barrel
probably partly triggered by the strong euro, with the EUR/USD starting the day close to the 1.15 level. Following the dovish comments (see below) and somewhat higher US core inflation data, the EUR/USD fell back to just below 1.14.
EUR/USD
54 1.16
52
1.14
50 48
1.12
46
Nowotny and Restoy sound the alarm The Governor of the central bank of Austria and ECB Governing Council member Ewald Nowotny sounded more worried than
1.10
44 42 12-Aug 22-Aug 1-Sep 11-Sep 21-Sep
1.08 1-Oct
11-Oct
before about the inflation outlook. He said that the ECB was
Oil Brent USD/barrel (lhs)
ECB projection rest 2015
‘clearly missing’ its inflation target. This was partly due to oil prices,
EUR/USD (rhs)
ECB projection rest 2015
which the ECB could not control, however he also pointed out that core inflation was also ‘clearly’ below target. He concluded that
Source: Thomson Reuters Datastream, ECB staff projections
additional steps are necessary to help the ECB reach its objective and this could include ‘additional instruments’ including ‘structural
Fed’s Dudley uncertain, but brings more arguments for delay
tools’. It is unclear what he exactly meant by the latter, but it does
William Dudley, President of the New York Fed, discussed
sound as if he would support a stepping up of QE. Meanwhile, the
monetary policy at Brookings on Thursday. He said that he didn’t
Deputy Governor of the Bank of Spain Fernando Restoy struck a
know whether the Federal Reserve would raise rates in December,
similar note, saying the ECB could extend QE if the inflation
but most of his arguments suggest that he would be in favour of a
outlook was not compatible with its goals.
delay. Mr. Dudley is widely considered a dove and recent speeches suggest that at least three other voting FOMC members
Inflation on track to undershoot
(of the ten) are in favour of a delay. He mentioned that recent
Even though the dovish commentary pulled down the EUR/USD, it
economic news suggests that the US economy is slowing. He also
remains above the levels assumed in the ECB’s staff projections in
suggested that financial market turmoil has brought about
September (see chart). This points to further downgrades to the
additional risks which are important to take on board at the
growth and inflation outlook compared to last month. Meanwhile,
forefront of a rate hike decision. We expect the Fed to wait until
oil prices are trending at lower levels than assumed, which is
well into 2016 before raising interest rates.
positive for growth but negative for inflation. Given that the ECB was already forecasting an undershoot of its inflation goal over the
US Core CPI picks up in September
medium term then, these changes suggest the gap will be wider.
Meanwhile, energy prices continued to be a drag on September’s US headline inflation, while core CPI picked up. Headline CPI fell
ECB to increase and extend QE
0.2% from -0.1% the previous month, while core CPI increased by
The ECB commentary is consistent with our base scenario that
0.2% from 0.1%. Core services, including shelter, resumed its
sees further ECB monetary easing by the end of this year. We
upward path in September. Core services has been offsetting the
expect the ECB to extend its asset purchases beyond September
weaker growth of core goods prices, which has been under
2016. We also expect the ECB to raise the level of its monthly
pressure as a result of the stronger USD and falling import prices.
purchases (by EUR 20bn a month taking the total to EUR 80bn
We maintain our view that the services inflation will continue to
p/m). A stepping up and extension of QE should offset the upside
show moderate growth rates, while core good prices will in the
for EUR/USD, as market pricing out Fed rate hikes weighs on the
coming time will remain a drag, driven by the indirect impact of
US dollar. Our year end forecast for EUR/USD is 1.12.
lower energy prices and the impact of a strong USD.