European Central Bank (ECB) Press conference October 2016

https://www.ecb.europa.eu/press/pressconf/2016/html/is161020.en.html

Same Old: As lower for longer rates continue

“…we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases. ”

..and with continued asset purchases

“Regarding non-standard monetary policy measures, we confirm that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

Resilient Eurozone

“Following the UK referendum on EU membership, our assessment is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience. ”

Slower growth in Q2; Modest growth expected in Q3

“Euro area real GDP increased by 0.6%, quarter on quarter, in the first quarter of 2016, after 0.4% in the last quarter of 2015. Growth continues to be supported by domestic demand, while export growth has remained modest. Incoming data point to ongoing growth in the second quarter of 2016, though at a lower rate than in the first quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate pace..”

Headwinds remain

“…headwinds to the economic recovery in the euro area include the outcome of the UK referendum and other geopolitical uncertainties, subdued growth prospects in emerging markets, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms. Against this background, the risks to the euro area growth outlook remain tilted to the downside.”

From deflation to Inflation with inflation

“According to Eurostat, euro area annual HICP inflation in June 2016 was 0.1%, up from -0.1% in May, mainly reflecting higher energy and services price inflation. Looking ahead, on the basis of current futures prices for oil, inflation rates are likely to remain very low in the next few months before starting to pick up later in 2016, in large part owing to base effects in the annual rate of change of energy prices.”

Tapering is not on the table yet

“We did not discuss tapering”

European Central Bank (ECB) President Mario Draghi at at Deutscher Bundestag, Berlin, 28 September 2016

A 0% target inflation is not good for the economy

“Sometimes people wonder whether price stability doesn’t mean inflation of 0%. It does not, because both inflation that is too high and inflation that is too low for too long can damage the economy. A steady, measured rate of inflation below, but close to, 2% in the medium term acts like a cushion that protects our economies from drifting into the dangerous territory of negative inflation even when there is just a minor economic shock.”

The measures to boost the inflation rate have been successful

“Our measures have delivered. We estimate that they will raise the inflation rate by more than half a percentage point, on average, over 2016 and 2017. They will also contribute to increasing real euro area GDP growth by more than one and a half percentage points cumulatively between 2015 and 2018, which will support job creation.”

Low rates reflect the slump in economic growth

“Low rates are a symptom of the underlying economic situation. They reflect weak long-term growth trends and the protracted macroeconomic slump that has resulted from the crisis. ”

Efforts bearing fruit

“Through our efforts to bring inflation back towards 2%, we have contributed to higher growth and the creation of more jobs. In Germany, exports are benefitting from the recovery in the euro area, unemployment is at its lowest level since reunification, people’s take-home pay is increasing noticeably, and venture capital is pouring into Berlin’s silicon alley.”

Lose here, gain there

“What a household may lose in terms of little interest on their bank account, it might save in lower mortgage payments for their home. And it might benefit from rising bond and stock prices in their retirement fund. In fact, evidence shows that between 2008 and 2015 interest payments by households in Germany, as a percentage of gross disposable income, fell more sharply than interest earnings.”

The ECB is not solely to blame for low bank profitability

“The ECB’s monetary policy is not the main factor for the low profitability of banks. While some banks’ business models may indeed need to adapt to the current low interest rate environment, they also need to address their own structural issues, such as overcapacity, the stock of non-performing loans and the potential impact of technological innovation. Low profitability is closely linked to low operational efficiency.”

The Euro area is not overheating.

“Of course, low interest rates for a long period might carry the risk of overvaluation in asset markets as a result of the search for yield. This is why we closely monitor potential risks to financial stability that might emanate for instance from local real estate markets. But at the moment we are not seeing any overheating in the euro area or the German economy as a whole.”

Real interest rates depend on the long term growth prospects of the economy

“It should also be noted that the level to which real interest rates can eventually return when the economy strengthens is not determined by monetary policy. Instead, it depends on the economy’s long-term growth prospects. Productivity and demographics play a decisive role in this, and the development of these factors has not been favourable in Europe in recent years.”

European Central Bank (ECB) Press conference September 2016

https://www.ecb.europa.eu/press/pressconf/2016/html/is160908.en.html

Lower for longer rates

“Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.”

..and continued asset purchases

“Regarding non-standard monetary policy measures, we confirm that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

Resilient Euro area

“Overall, while the available evidence so far suggests resilience of the euro area economy to the continuing global economic and political uncertainty, our baseline scenario remains subject to downside risks.”

Slow growth expected in Q3 in the Euro Area

“Euro area real GDP increased by 0.3%, quarter on quarter, in the second quarter of 2016, after 0.5% in the first quarter. Incoming data point to ongoing growth in the third quarter of 2016, at around the same rate as in the second quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate but steady pace.”

Monetary support essential for achieving target inflation levels

“To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need to preserve the very substantial amount of monetary support that is necessary in order to secure a return of inflation rates towards levels that are below, but close to, 2% without undue delay.”

ECB Balance Sheet Contracting

As the Fed continues to apply stimulus to the economy, the ECB’s balance sheet has quietly been contracting at a fairly rapid pace.  The contraction has largely been the result of the repayment of LTROs by a strengthening European banking system, which have fallen from 1.1T Euros last year to ~700B today.

Given that the relationship between the Euro and the Dollar has been correlated with the relative size of the Fed and ECB balance sheets over the last five years, this relative contraction in the ECB balance sheet could help to explain the recent weakness in USD vs. the EUR.  It could also be foreshadowing a rebound in USD denominated commodity prices if EUR strength is a signal that QE is taking hold.

Fed vs ECB Assets

Source: FRED Data