The ECB’s decision to hold rates fell within our and market expectation. This saw the euro weaken as we await the timing of the ECB’s end to its stimulus programme. We reiterate our view that the ECB will end its QE by endDecember and lifting the rates later in 2019 in view of the weak data on the back of a slowdown in the Eurozone economy.

We are of the view that the underlying inflation will gather steam due to: (1) the current monetary policy stance; (2) a tighter labour market and rising wages; (3) broad-based growth; and (4) the absorption of economic slack. In addition, risks are balanced in the bloc while we stay put with our base case scenario that there would not be a fullblown trade war, and we expect the economy to continue expanding. However, we believe the external noises will continue to act as a challenge to the Eurozone.

Hence, we foresee the ECB to detail out its QE exit in the July meeting. We believe the €30 billion bond-purchasing programme will end in September and taper down further to €15 billion in 4Q2018 before ending it. Should this fall in line, we expect normalisation to kick in in 2Q2019.

ECB interest rate decision

• In line with our view, the European Central Bank (ECB) kept interest rates unchanged, given signs that the euro area's growth outlook may have softened.

• The ECB's interest rate on its main refinancing operations and the interest rates on the marginal lending facility and deposit facility will remain unchanged at 0%, 0.25% and -0.40% respectively.

• The timing of the ECB’s end to its stimulus programme is crucial because it gives a major clue about when the ECB could then look to raise interest rate benchmarks.

• It now appears that the ECB may take longer than expected given their concerns over the risk of a trade war despite the US Fed gearing up to raise interest rates several times in 2018. This can derail the ECB’s inflation of 2% target owing to the stronger euro.

• The ECB in March surprised us and the markets by signalling it is on track to end its stimulus programme before the end of 2018. But since then, economic data has pointed to a slowdown in the Eurozone economy. That has led us and the market to dial back expectations regarding the winding down of the bond-buying programme which we are looking at end-December and the eventual lifting of interest rates which could happen at the later part of 2019.

• In the near term, we expect the USD to extend its gains even as the 10-year Treasury yield is on the uptrend driven by corporate news. The euro will likely stay weak for a while but should regain momentum over the medium term.

• We are of the view that the underlying inflation will gather steam due to: (1) the current monetary policy stance; (2) a tighter labour market and rising wages; (3) broad-based growth; and (4) the absorption of economic slack. In addition, risks are balanced in the bloc while we stay put with our base case scenario that there would not be a full-blown trade war, and we expect the economy to continue expanding. However, we believe the external noises will continue to act as a challenge to the Eurozone.
• Hence, we foresee the ECB to detail out its QE exit in the July meeting. We believe the €30 billion bond-purchasing programme bond will end in September and taper down further to the €15 billion in 4Q2018 before ending it. Should this fall in line, we expect normalisation to kick in in 2Q2019.

Source: AmInvest Research - 27 Apr 2018