ECB Drops Pledge to Increase Size of QE Program

As expected, the European Central Bank (ECB) made no changes to monetary policy at the conclusion of its March 8 meeting. However, markets got an update to forward guidance, as the ECB removed language from its statement indicating that “the Governing Council stands ready to increase the asset purchase program in terms of size and/or duration.” The statement did however, continue to note that the ECB may extend its quantitative easing program (QE) past the previously communicated end date of September 2018 if needed. An updated set of economic projections showed a small increase in 2018 Gross Domestic Product (GDP) expectations and a slight decrease in inflation expectations for 2019. These changes were enough for central bank watchers to notice, but aren’t likely to have much of an impact on markets.

Markets initially took the forward guidance change as a little hawkish; however, the reaction was muted given investors’ expectations for the ECB to slowly tighten monetary policy (not increase it)—a view we share. Prior to the current September 2018 QE end date, we expect the ECB to announce plans to extend asset purchases for a period of time, albeit at a slower pace than the current 30 billion euro level. However, we don’t expect any changes to interest rate policy until well into 2019.

Chief Investment Strategist John Lynch summarized as follows, “Overall, we don’t see the ECB’s forward guidance change as meaningful for markets, and we don’t expect changes from tomorrow’s post-meeting statement from the Bank of Japan either. However, the Federal Reserve’s March 20-21 meeting, where we expect a 0.25% rate hike, may be more impactful. Fed Chair Powell’s first post-meeting press conference will be a focal point for markets, as will updated economic and interest rate projections (dot plots) given the market’s recent focus on inflation.”



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