European Central Bank

January 19, 2017

All things considered, the Governing Council of the ECB sent a dovish signal to the marketplace but announced no policy modifications after the first of eight scheduled reviews in 2017.

Consider, for example, that on-year inflation in the most recent twelve months compared to the previous 12 months through December 2015 had risen by 1.5 percentage points (ppts) in Germany and Spain, 1.3 ppts in Finland, 0.7 ppts in Belgium, Cyprus and Greece, 0.6 ppts in Portugal, 0.5 ppts in France, and 0.4 ppts in Italy. Consider, too, that headline inflation for the whole euro area had nearly doubled to 1.1% last month from 0.6% in November and 0.2% as recently as August, or that inflation in the union’s largest economy, Germany, of 1.7% is near the ECB’s target for the whole region. Finally, bear in mind that the current policy stance, by the Governing Council’s own admission, constitutes a “very substantial degree of monetary accommodation” and that monetary conditions since the U.S. election have loosened as a result of the euro’s almost 2% trade-weighted depreciation over that span.  At the least, this backdrop might have tempted some policymakers to acknowledge that policy influences have reduced the odds of more stimulus in the future.

As expected, the Governing Council left interest rates and asset buying plans unchanged. That means a negative 0.40% deposit rate, a zero refinancing rate, and continuing the asset purchase program through the end of 2017 at the rate of EUR 80 billion per month through the end of 1Q and EUR 60 billion thereafter.

In discussing inflation, the introductory statement plays down the recent acceleration in headline CPI.

This reflected mainly a strong increase in annual energy inflation, while there are no signs yet of a convincing upward trend in underlying inflation. Looking ahead, on the basis of current oil futures prices, headline inflation is likely to pick up further in the near term, largely reflecting movements in the annual rate of change of energy prices. However, measures of underlying inflation are expected to rise more gradually over the medium term, supported by our monetary policy measures, the expected economic recovery and the corresponding gradual absorption of slack.

Guidance regarding future policy defines a balance of risk weighted toward more, not less, support than is currently planned.

Our net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

The Governing Council will continue to look through changes in HICP inflation if judged to be transient and to have no implication for the medium-term outlook for price stability.

A very substantial degree of monetary accommodation is needed for euro area inflation pressures to build up and support headline inflation in the medium term. If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate. In particular, if the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase program in terms of size and/or duration.

No mention, however, hypothetical, that policy might end up being less accommodative in 2017 than provided by the present stance. In press conference remarks, ECB President Draghi said policy would be guided by Ezone-wide indicators, not the inflation performance of any individual members like Germany. Implicitly, that means that German inflation will need to exceed 2.0% sometime during this year, and such a development will not be collateral damage but rather part of the policy’s essential design.

The 500 pound gorilla in the press conference room is how the change of U.S. administration is going to affect ECB policy, if at all. Draghi wouldn’t comment on anything said by President-Elect Trump about trade, the European economy, or the usefulness of the EU and a single monetary policy for the region. Now and in the future, he plans to speak only about actual policies undertaken by the United States, not things said.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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