{LONGTERMINVESTORS} Fwd: EZ: ECB maintains status quo; raises growth and inflation forecast

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From: <research@icicibank.com>
Date: Thu, Jun 2, 2016 at 8:21 PM
Subject: EZ: ECB maintains status quo; raises growth and inflation forecast
To: stockdesai@gmail.com

EZ: ECB maintains status quo; raises growth and inflation forecast Central Bank watch: ECB maintained its accommodative stance and kept all interest rates and the size of its asset purchase program unchanged. ECB expects improvement in balance of risks but downside risks remain; inflation forecast was revised upwards on account of some recovery in energy prices. Policy divergence between the US and the EZ is likely to weaken the Euro over the medium term The ECB kept key interest rates unchanged wherein the rate on the main refinancing operations is at 0%, the rate on marginal lending facility is at 0.25% and the rate on the deposit facility stands at -0.4%. Monthly asset purchases were kept unchanged after being raised to EUR 80bn (from EUR 60 bn previously) in its March meeting. Further, its scope was expanded to include euro-denominated bonds issued by non-bank corporations in the Euro-area. In today's policy, ECB decided to embark on its newly introduced corporate sector purchase programme (CSPP) from June 8th. Further, the new series of targeted long term refinancing operations (TLTROs) will be launched on June 22nd. Chart 1: ECB keeps rates unchanged Balance of risks seen to improve, though still tilted to the downside ECB President Mario Draghi talked of modest recovery in the Euro-area economy, underscored by the Central Bank's stimulus packages taken up in March. Investments have picked up amid improving credit conditions. Lagged effects of this year's oil price declines continue to support a rebound in private consumption. As a result, 2016 growth forecast was revised upwards to 1.6% YoY, while those for 2017 and 2018 were pegged at 1.7% YoY each. Global uncertainties owing to weakness in emerging market conditions, continuing balance sheet adjustments in various sectors of the economy and slow pace of structural reform implementation in the Euro-area continue to pose risks to outlook. He remarked that while downside risks to the outlook persist from global headwinds but balance of risk seem to have improved slightly in light of ECB's monetary policy stimulus. President Draghi pointed out inflation is expected to remain sticky at negative levels in the coming months before picking up in the second half of the year. In conclusion, President Draghi reiterated his earlier stance on maintaining an "appropriate degree of monetary accommodation" to ensure that inflation returns to ECB's target of ~2% YoY, "without undue delay". He also added that the Central Bank stands ready to act further by using all tools available within its mandate, if inflation fails to pick up. Chart 2:  Growth forecast and inflation outlook revised higher Euro outlook: To trade with depreciation bias   The Euro has weakened in recent sessions, retracing to ~1.11 levels from the highs of ~1.15 levels vs. the US Dollar since ECB's last policy announcement in April. Ahead of the policy outcome, Euro climbed to ~1.12 levels retracing thereafter to its prior levels. The common currency showed little response to today's policy decision as markets widely expected ECB to hold interest rates unchanged in this policy meeting and is currently trading at 1.117 levels. Going ahead, we believe that the policy divergence between the ECB and Fed, as the Fed continues its path of policy normalisation, will weigh on the currency. We expect the common currency to trade around 1.05-1.07 levels by the end of this year. Regards, ICICI Bank Contact: Sonal Surana (+91-22) 2653-1414 (extn: 7243) sonal.surana@icicibank.com ​

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CA. Rajesh Desai

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