Huitong Network News--December 14, Beijing time, the European Central Bank maintained monetary policy, followed by Draghi held a press conference pointed out that the euro zone economic growth is strong, but whether to withdraw from the QE still depends on the inflation outlook. And the US retail sales data released during the same period put pressure on the euro, which fell more than 40 points to 1.1799 as of press time, with a magnitude of more than 60 points.
On Thursday, Beijing time, the European Central Bank maintained monetary policy, and Draghi held a press conference to point out the strong economic growth in the euro area, but stressed that whether to withdraw from QE still depends on the inflation outlook. And the upturn in US retail data released during the same period once put pressure on the euro, which fell more than 40 points to 1.1799 against the dollar as of press time, but the magnitude was as high as 60 points and the relative high hit 1.1862.
Prior to this, the European Central Bank announced a new interest rate decision to keep the policy parameters unchanged. Moreover, the ECB issued a statement emphasizing that if the outlook deteriorates or the financing environment is inconsistent with the path of sustainable adjustment of inflation, the management committee will increase the QE in terms of duration and scale.
The European Bank also expects key interest rates to remain at their current levels for an extended period of time and exceed the net asset purchase programme. The euro system will continue to reinvest the principal of maturing securities under the bond purchase program until after the end of the net asset purchase program and for a longer period if necessary.
On monetary policy
Mr Draghi said eurozone indicators showed strong economic growth, monetary policy supported domestic demand, a broad global economic recovery supported eurozone exports and rising employment boosted private consumption. The risks to the eurozone economic outlook are generally balanced, members are more confident about the inflation path, and core inflation will gradually rise in the medium term.
On the expectation of economic growth
Draghi also comprehensively raised economic growth this year, next year and the next two years, with GDP growth expected to be 2.4% in 2017, 0.2 percentage points higher than expected in September, and 0.5 percentage points to 2.3% in 2018 and 0.2 percentage points to 1.9% in 2019.
On inflation expectations
But Mr Draghi said frankly that the QE would continue until the ECB saw a sustained adjustment in inflation, price pressures within the eurozone remained moderate, reinvestment helped to convey a reasonable position, and there was enough support for the need for stimulus to boost inflation.
Draghi raised his 2018 inflation forecast by 1.4%, 0.2 percentage points higher than the September forecast. But inflation expectations remained unchanged at 1.5 per cent in 2017 and 2019, and he believes inflation will moderate in the coming months before climbing again.
Huitong net observation believes that although Draghi is optimistic about the economic growth prospects of the euro zone, there is still a lack of obvious confidence in whether inflation can rise effectively, which is the main reason for the plunge of the euro against the dollar.
Faced with five years of stagnant or falling prices, the ECB has used all its policy tools to cut interest rates to negative areas, provide low-interest loans to banks and buy bonds in the hope of stimulating growth and reviving inflation.
But hawks continue to try to persuade Draghi to prepare the market for an end to asset purchases next year, arguing that the central bank should gradually adjust its language to lay the groundwork for a formal decision to end 2.55 trillion euros ($3 trillion) of bond purchases by the middle of next year.
As the euro zone's economic recovery now enters its fifth year, the ECB's efforts have paid off. Continued economic growth makes it all the more reason for more conservative policymakers to believe that the ECB's work is nearing completion, so it should take a step back and let other sectors take over the rest of the work, leaving ammunition after the crisis has peaked.
FlorianHense, an economist at Germany's Berenberg Bank, said: "even doves at the ECB will be uneasy about extending the asset purchase program beyond September 2018, so we expect the ECB to take a small step towards withdrawing the stimulus and start the program by gradually fine-tuning its policy guidance in the first nine months of 2018. "
Inflation forecast for the next three years is the focus
The key to attracting much attention is how the ECB makes a preliminary forecast for inflation in 2020, which can be used to judge whether higher oil prices will push up inflation and how far it is from the central bank's target of approaching but below 2 per cent.
In his speech today, Draghi gave the euro zone inflation expectations for the first time in 2020, saying that by that time the average inflation in the euro area will reach 1.7%. But Mr Draghi has previously said that inflation of 1.7 per cent would be seen as falling short of expectations, so the figure at the low end of the forecast range would hardly be a reason to withdraw from easing.
Germany's Berenberg, UBS and Societe Generale expect the 2020 inflation outlook to be close to but below the ECB's inflation target of 2 per cent. This will allow policy makers to end bond purchases by the end of 2018.
AnatoliAnnenkov, an economist at Soci é t é G é n é rale, said: "as central bank governor, it would be easier for Draghi to start some process of normalizing interest rates before the end of his term. Although it took longer than expected, everything showed that we were on the right path, but it took courage to walk the last mile. "
Fuelled by stimulus measures by the European Central Bank and the global economic recovery, the eurozone has recorded 18 consecutive quarters of expansion since it emerged from a double-dip recession. Sentiment surveys suggest that economic growth in the eurozone will accelerate, with some policymakers urging the ECB to act decisively.
Weidmann, president of the Bundesbank, and KlaasKnot, president of the Dutch central bank, called on the ECB to give an exact date for the end of bond purchases. Some officials said at the last meeting that there was no clear deadline and that investors might expect the stimulus to be extended.
There are differences on exactly when to end QE.
According to a previous survey, 52 of the 60 analysts surveyed expected the ECB to stop printing money by the end of next year, but respondents were divided on whether the decision would be announced in September. Only a handful of analysts expect the European Bank to extend its bond-buying program further beyond next year.
JenniferMcKeown, chief European analyst at Capital Macro, said: "the ECB has stated that it will not end its bond-buying program abruptly, so if it does so in September, it will destabilize financial markets. It is possible to decide to stop buying bonds in September, but this needs to be hinted in advance. Without changing its own rules, Eurobank has little choice and is bound to end its bond-buying programme next year because some of its national bond holdings are nearing the ceiling.
When asked whether the divergence of views of the board made it unlikely for the ECB to announce new easing, the number of analysts with both views was roughly equal.
MariusGeroDaheim, senior eurozone strategist at SEB, said: "in addition to the easing measures already announced, the chances of the ECB announcing new measures are very low because the economic outlook for the eurozone does not support further easing. If the economic outlook deteriorates, we expect the hawkish camp to change its position and support further measures. "
It is highly unlikely that interest rates will rise next year.
Six investment banks, including Nomura and Barclays, expect the ECB to raise interest rates as early as next year because of higher-than-expected inflation and rising risks to financial stability.
Analysts at ING believe that the European Bank's December interest rate decision is a regular event, especially given that the QE reduction plan was announced when the October decision was made. Some market participants may focus on their long-term economic outlook, but the next focus will be when the market will start valuing the ECB to raise deposit rates, which are not currently priced, but the possible starting point is expected to be next summer. will push the euro up to 1.25 against the dollar.
But NickKounis, head of financial market research at ABN Amro, said: "Draghi will be cautious about the shift in market expectations that will end the stimulus earlier. He believes that inflation forecasts for 2020 are almost in line with the target, underlying inflationary pressures at the ECB are still weak, and they do not think the turning point has come.
If the ECB stops buying bonds at or near the end of 2018, it will not raise interest rates for the first time until at least 2019. Given that the ECB has pledged to keep interest rates unchanged for some time after stopping net asset purchases, most economists expect the ECB to raise interest rates no earlier than the second quarter of 2019.
Brexit remains the biggest challenge for the euro zone in 2018
The next chairman of the Eurogroup, Portuguese Finance Minister Mario Centro, said in a recent interview: Brexit will be a key challenge for the eurozone in 2018.
"of course, we need to follow up on the Brexit process, which I hope eurozone countries will understand as a structural reform," Centro said. He added that politicians in eurozone countries needed time to adapt their economies to "these structural changes".
Although Britain voted to leave the EU as early as June 2016, it is still a long way from leaving the EU. As a result, the economic impact of Brexit on the euro zone may not be known.
But Mr Centro said this would not prevent the eurozone from continuing to reform. "it is not scary to face negative shocks and we can work out positive solutions," he said. "