Global weekly: More monetary easing ahead

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After dovish remarks at the press conference, we expect the European Central Bank (ECB) to increase its assetpurchasing programme on worries about global growth and inflation

Macro outlook

ECB President Mario Draghi struck a very dovish tone during Thursday’s press conference. He said that recent developments pointed to a ‘weaker economic recovery and slower increase in inflation rates’ than previously expected. In addition, ‘downside risks’ had emerged for both growth and inflation. He followed up the dovish commentary by announcing downgrades to the ECB’s growth and inflation forecasts. Importantly, this also included the inflation projection for 2017, which is currently seen as representing the medium term horizon crucial for policy decisions. The ECB left its monetary policy unchanged, but these are strong signals that the central bank will likely step up its asset-purchasing programme.

Additional monetary easing by the ECB is now our base case scenario (we previously saw a 40% chance). We think that the central bank will most likely do this by stepping up the pace of its monthly purchases and that it needs to increase the eligible universe of assets it will buy. More monetary easing will likely be announced before the end of this year.

The central bank already announced a change in its existing asset-purchasing programme, that may help to expand it going forward. It decided to increase the issue share limit from 25% to 33%, which will give it a little more flexibility in its purchases. More importantly, it opens the door for more changes.

The ECB’s remarks supported both equity and government bond markets on Thursday. German 10-year Bund yields declined by around 5 basis points, while the Eurostoxx index was up by almost 3%. Meanwhile, the prospect of more monetary easing also weighed on the euro, with EUR/USD declining to around the 1.11 level.

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