ECB Decisions and Draghi Press Conference

June 14, 2018

Investors found the ECB message today somewhat more dovish than feared. To be sure, the released introductory statement confirmed that new asset purchases will be completed by the end of this year. Draghi’s statement asserts that “progress towards a sustained adjustment in inflation has been substantial so far. With longer-term inflation expectations well anchored, the underlying strength of the euro area economy and the continuing ample degree of monetary accommodation provide grounds to be confident that the sustained convergence of inflation towards our aim will continue in the period ahead, and will be maintained even after a gradual winding-down of our net asset purchases.” Also, projected CPI inflation this year has been revised upward by 0.3 percentage points to 1.7%.

The market’s dovish spin on the ECB reflects several factors:

First, quantitative easing isn’t ending cold turkey after September as some analysts expected. The current asset buying pace of 30 billion euros per month will be throttled back to EUR 15 billion in October and continued over the remaining two months of this year’s final quarter. Moreover, the ECB reaffirmed that the principal of maturing securities bought under the asset purchase program will continue to be reinvested in any case “for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.” Monetary accommodation stems not merely from ongoing asset purchases but from the bloated central bank balance sheet from “the sizeable stock of acquired assets and the associated reinvestments.” Quantitative stimulus since the program began in January 2015 totals about 2.4 trillion euros.

Second and even more importantly, not only were ECB interest rates including a negative 0.40% deposit rate left unchanged, but the Governing Council in its forward guidance said that an initial rate hike will not be undertaken until “at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with our current expectations of a sustained adjustment path.”

Third, there is even a hint that policy stimulus could be augmented. “In any event, the Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.” Although still maintaining that growth risks are balanced, Draghi’s statement pays closer attention to recent trade policy developments: “Uncertainties related to global factors, including the threat of increased protectionism, have become more prominent. Moreover, the risk of persistent heightened financial market volatility warrants monitoring.”

A fourth factor behind the dovish interpretation of this month’s ECB decision relates to the updated macroeconomic forecasts. Projected growth in 2018 was revised down 0.3 percentage points to 2.1%. Projected growth next year of 1.9% and 1.7% in 2020 lies below the expectations for this year and is no higher than assumed at the March or December policy review. Projected CPI inflation in 2018 was raised by 0.3 percentage points to 1.7% due to oil price developments, but officials do not envisage acceleration thereafter. Projected consumer price increases are 1.7% for 2019 and 2020 as well, which means that even if a negative 0.40% deposit rate is not increased through the summer of 2019, inflation will probably stay somewhat south of the goal of “below but close to 2.0%” that defines medium-term price stability.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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