ECB in No Hurry to Rein in Stimulus

March 9, 2017

The Governing Council made no change in its interest rate structure and reiterated that any move to higher-than-present levels will occur “well after” quantitative stimulus ends. There will be EUR 80 billion of asset purchases this month followed by a pace of EUR 60 billion per month during the last nine months of 2017 or “beyond, if necessary, and in any case until the Governing Council sees a sustainable adjustment in the path of inflation, consistent with its inflation aim.”

A released statement is somewhat more upbeat about growth in the euro area and wider global economy but continues to anticipate drags due to” a sluggish pace of implementation of structural reforms and remaining balance sheet adjustment needs.” Newly updated growth forecasts are compared to previous quarterly unveilings in the table below.

GDP,% 2017-f 2018f 2019f
March 2017 1.8% 1.7% 1.6%
Dec 2016 1.7% 1.6% 1.6%
Sept 2016 1.6% 1.6%
June 2016 1.7% 1.7%
March 2016 1.7% 1.8%

The Council’s justification for continuing aggressive monetary accommodation is summarized in the following passage and supported by it latest inflation projections that put inflation no higher than 1.7% in 2019 on average.

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 still needed for underlying inflation pressures to build up and support headline inflation in the medium term. 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.

Thus, higher projected inflation this year of 1.7% is followed by a dip to 1.6% next year, and average inflation in 2019 ends up no higher than this year. Put differently, the view on inflation hasn’t changed in the past year in spite of a swing in the 12-month change of consumer prices from minus 0.2% in February 2016 to an increase of 2.0% last month. ¬†Between those sequential 12-month intervals energy prices swung from -8.1% to +1.2%, and food climbed from 0.6% to 2.8%, but core inflation of 0.9% last month had edged up only 0.1 percentage point since a year earlier.

CPI, % 2017f 2018f 2019f
March 2017 1.7% 1.6% 1.7%
Dec 2016 1.3% 1.5% 1.7%
Sept 2016 1.2% 1.6%
June 2016 1.3% 1.6%
March 2016 1.3% 1.6%

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

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