European Central Bank Espouses Patience and Persistence

July 20, 2017

The latest Governing Council statement expresses growing confidence in growth and a return of inflation to target but fails to define when policy stimulus will be throttled back and the possible timetable for such a process. The signals are mixed. The statement reiterates that quantitative stimulus will continue for as long as necessary and doesn’t rule out more stimulus if the road to higher inflation hits a snag.

We confirm that our net asset purchases, at the current monthly pace of €60 billion, are intended to run 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 net purchases are made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme.

The incoming information confirms a continued strengthening of the economic expansion in the euro area, which has been broadening across sectors and regions. The risks to the growth outlook are broadly balanced. While the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim, it has yet to translate into stronger inflation dynamics. Headline inflation is dampened by the weakness in energy prices. Moreover, measures of underlying inflation remain overall at subdued levels. Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term. If the outlook becomes less favourable, 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 programme in terms of size and/or duration.

After the last meeting, Draghi had insinuated that plans for policy normalization may be relayed in September. Markets reacted more sensitively to the revelation than he had wanted to see, and so such specificity was avoided this time. In any case, new macroeconomic forecasts are scheduled to be unveiled at the September meeting.

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




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