15 June 2018 by lberuti
After the Fed on Wednesday, markets were focused on the ECB decision and announcement on rates and QE taper this week. Rather than being put off by the round of tariffs on Chinese goods confirmed by the US or by the renewed tensions among European countries on the back of the Aquarius saga, investors focused on the creatively dovish elements introduced by the ECB in their statement on Thursday. “The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path”. The big shock was that inclusion of calendar based guidance on rates which is the first time the ECB has done such a thing and is a material evolution to the policy framework. What happens if inflation edges up unexpectedly over the next 12-15 months is anybody’s guess. The other dovish element was the taper reference. Unsurprisingly, the ECB announce a cut to €15bn/month from September (with QE ending in December) but the caveat was that it would still be “subject to incoming data confirming the Governing Council’s medium-term inflation outlook”. It certainly looks like conditional taper. Volatility addicts might go through another painful patch, and last week’s wides now look a distant memory.