The highly anticipated 8 September meeting of the European Central Bank (ECB) resulted in no change to monetary policy. The ECB did not adjust its deposit rate (-0.40%) or main refinancing rate (0.00%), and repeated its pledge to continue purchasing EUR 80bn in bonds every month until the end of March 2017 “or beyond, if necessary”.
That said, we expect the ECB to continue its asset purchase programme beyond March 2017. The ECB noted that it would look at changes to the rules governing asset purchases given the shortage of eligible bonds. In our view, this statement does not just clarify a technical aspect but also signals that the ECB will continue the programme beyond the first quarter of 2017.
Our conclusion is corroborated by the new projections put out by the ECB's economic staff. The updated figures differ only slightly from the June ones (see table below), which means that the ECB is counting on a very slow rise in inflation towards its 2.0% target.
Queried on the absence of further announcements following this meeting, Mr Draghi noted that the staff's projections had not changed enough to merit any immediate measures. These remarks are a clear indication that, at this point, the ECB does not believe that the Brexit referendum will substantially affect the growth outlook in the Eurozone.
Eurozone statistics published last week appear to bear this out. Second-quarter GDP growth was +0.3% quarter on quarter and +1.6% year on year (Q1: +0.5% and +1.7%, respectively). And PMI indicators, which were resilient in July and slipped only slightly in August (the Manufacturing PMI went from 52.0 to 51.7, while the Services PMI dropped from 52.9 to 52.8), point to continued growth in the Eurozone.
We would not be surprised if, following the 8 December meeting, the ECB announces plans to extend the asset purchase programme beyond March 2017 at the same time that it announces a change in the rules (especially regarding the allocation by country).
PMI surveys in the UK delivered a surprise when they bounced back after dropping in July. The Manufacturing PMI rose from 48.3 in July to 53.3 in August, while the Services PMI went from 47.4 to 52.9. What this means for the country’s economic outlook is hard to say. Back when the results of the Brexit vote were announced, these indicators dropped sharply. Their recovery in August is probably a sign of declining pessimism that may owe something to the measures announced by the BoE on 4 August. Along these same lines, retail sales in July held firm, which can be interpreted as reassuring. But they may have gotten a boost from tourism (following the drop in the pound) and from consumers who, expecting inflation to rise, bought earlier than planned. The key variable for the UK’s economic outlook will be the level of investments. The uncertainty surrounding the Brexit negotiations are likely to put a damper on investment decisions. According to the Confederation of British Industry (CBI), investment plans in the UK, measured from June to August, are at their lowest level in four years. The UK is also facing serious international pressure to speed up its negotiations with the EU. On 5 September, on the eve of the G20, Japan threatened to move Japanese companies out of the UK if the British government could not guarantee ongoing future access to the European market. Until some real visibility is achieved, the investment outlook in the UK is unlikely to improve.