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ECB: What was in the statement...Rabobank

FXStreet (Barcelona) - Analysts at Rabobank broke down the ECB statement and explained, that as expected, the ECB kept its benchmark rates unchanged today.

Key Quotes:

“We felt that today’s press conference was not wholly satisfying and, at times, as cloudy as the city’s overcast”.

“Markets reacted with a certain dose of disappointment, with the euro briefly touching 1.2690 having been as low 1.2620 earlier today”.

“In the opening statement Draghi painted a fairly subdued picture of the economic outlook, notably for the remainder of this year”.

“The ECB will start purchasing covered bonds in the second half of October and ABS in the fourth quarter of 2014 (suggesting they are not entirely ready to commence with the latter yet)”.

“Moreover, when questioned about the stated aim of a “EUR 1bn expansion” of the ECB’s balance sheet, Draghi was less forthcoming, refusing to explicitly calling it either an expectation or a target”.

... and what was left out

“But perhaps even more important is what was left out of today’s statement”.

One key observation we have made is that Draghi did not repeat his call (made before the European Parliament on 22 September) that the ECB was ready to alter the “size and composition” of its measures. This appears to signal backtracking on the EUR 1bn expansion claim and may point to a divergence of opinions within the Council with regard to QE. In that sense, the focus (for now) may have shifted back a bit to the ‘credit easing’ nature of recent measures”.

“A second observation we have made is that whilst Draghi highlighted the downside risks to the economy, he did not repeat his usual mantra of risks to price stability being “broadly balanced”. Instead he said: “[…] Governing Council will continue to closely monitor the risks to the outlook for price developments over the medium term. In this context, we will focus in particular on the possible repercussions of dampened growth dynamics, geopolitical developments, exchange rate developments and the pass-through of our monetary policy measures.”

“The fact that the inflation risk sentence was left out could be an indication that the ECB is working on a more in-depth assessment of inflation risks. In this respect it is worthwhile to note that the ECB President also mentioned that recent downside inflation surprises (“forecasting errors”) were not easy to explain by falling food or energy prices or developments in the exchange rate, but instead might be the cause of other factors such as unemployment”.

“Therefore, we would expect the ECB to launch a more thorough (internal) inflation/deflation risk assessment in the coming months, taking into account the (initial) impact of its recent easing measures and the development of medium-term inflation indicators. The December projections, which take place after the comprehensive review, could be an important 'vehicle' for that exercise”.

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