ECB Officials Becoming More Optimistic But Not Enough So to Reduce Stimulus

April 27, 2017

A statement released after today’s meeting of the European Central Bank Governing Council proclaims, “that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished” but goes on to say “underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend. Moreover, the ongoing volatility in headline inflation underlines the need to look through transient developments in HICP inflation, which have no implication for the medium-term outlook for price stability.”

Guarded optimism dictates that the interest rate structure running from 0.25% on the marginal lending facility through zero percent on the repo rate to a deposit rate of -0.1% must remain “at present or lower levels for an extended period of time, and well past the horizon of net asset purchases.” A 60 billion euro per monthly pace of such will run to end-2017, “or beyond if necessary.” This means that QE will only end when officials are confident that inflation has adjusted to a sustained path in line with the objective of “below but close to 2%.” Although the mandate applies to total CPI inflation, policy thinking is currently being guided by core inflation. This is not a contradiction because at the moment, only core inflation provides the informing data regarding future inflation in the medium term, and policy focuses on the path officials expect inflation to take, not the path is has recently traced. Once again, officials implore the member governments to step up structural reforms, which have been implemented in frustratingly slow and incomplete manner.

In press conference, ECB President noted that policy change at this juncture wasn’t really debated. The inflation outlook is clearer than the prognosis for growth, which occupied much of the meeting’s discussion. Like his Japanese counterpart today, he limited what he was willing to say regarding policy developments in the United States. His bottom line was that the ECB assessment on inflation hasn’t materially changed, so substantial monetary accommodation continues to be needed.

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

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