ECB Meets, Revises Down GDP and Inflation Outlook, Opens Door to More QE

The ECB held its September policy meeting last week, and although it did not make any changes to policy rates, it downgraded its assessment of the Eurozone economy’s prospects with regard to GDP growth and inflation, and also expanded the scope of its current QE program. Despite a three pronged stimulus from lower energy prices, a lower Euro (a falling currency should make exports more competitive) and an ongoing QE program by the central bank, the Eurozone economy has failed to pick up steam, and is even in danger of slipping backwards as global factors negatively impact the bloc. The most recent print for GDP was 0.3% q/q growth, and the August reading for inflation was 0.2% y/y (1% core, which excludes food and energy prices). During the press conference that followed the meeting, EBC President Mario Draghi announced lower forecasts for inflation and GDP growth over the next couple of years, cutting GDP expectations in 2016 and 2017 to 1.7% and 1.8% from 1.9% and 2%, respectively. He also revised down the inflation forecasts for 2016 and 2017 to 1.1% and 1.7% from 1.5% and 1.8%. In addition, he said the ECB expects 0.1% inflation for the full year 2015 and 1.4% GDP growth. The other big takeaway was the increased cap on the proportion of a member country’s bonds the central bank can buy from 25% to 33%, subject to certain restrictions, while Draghi also opened the door to the program lasting beyond the originally expected September 2016 end date. Insofar as global rates influence our markets, these developments will very likely hold down Euro rates and reduce any upward pressure on U.S. Treasuries emanating from that region. We continue to expect a range bound environment for medium maturity domestic rates, regardless of Fed action, as inflation readings in the U.S. also continue to come in low, and in the absence of any driver from the global arena.

Source: Bloomberg, CRT