ECB Leaves Policy Settings Same, Boosts Projected Growth but Trims Projected Inflation

June 8, 2017

The European Central Bank retained its refinancing rate at zero, its deposit rate at negative 0.40%, its marginal lending facility rate at +0.25%, and quantitative stimulus was reaffirmed at a monthly pace of EUR 60 billion through 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 net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase program.”

The momentum of Euroland growth is deemed stronger, and growth risks no longer remain tilted to the downside. The ECB staff adjusts its projected GDP growth and CPI inflation forecasts on a quarterly basis, and the growth numbers were bumped higher for 2017, 2018 and 2019 as shown below:

GDP,% 2017-f 2018f 2019f
June 2017 1.9% 1.8% 1.7%
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%

Faster growth has not lifted core inflation, however. Projected total inflation was lowered for all three years due to energy developments for the coming year and further out because of subdued core inflation and wage pressure. That said, officials are more confident that the path of inflation’s convergence on the target of “below but close to 2%” will occur eventually and in an enduring fashion. As a result a diminished inflation tail risks, guidance on future policy is no longer skewed toward more easing. The new inflation forecast and previous ones are shown in the following table.

CPI,% 2017-f 2018f 2019f
June 2017 1.5% 1.3% 1.6%
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%

In his subsequent press conference, ECB President Draghi struck a balance between expressing more confidence about growth prospects and in the belief that “a very substantial degree of monetary accommodation” is achieving the objective of restoring inflation to its medium-term target but also defending the need for patience to keep policy ultra-stimulative until tangible results are achieved.

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.

Non-standard monetary policy measures with net asset purchases at EUR 60 billion will run at least through the end of this year and “in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

One way to lift inflation could be a softer euro, but U.S. President Trump is doing his best to make that highly unlikely.

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



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