ECB Presents Greater Willingness to Ease by all Mandate-Allowable Means Should that Become Necessary

April 3, 2014

There was not rate cut or additional unconventional stimulus unveiled after this month’s Governing Council policy meeting.  But tougher language was used in a released statement and at President Draghi’s press conference to convey that Council officials are taking this prolonged period of low inflation more seriously and are unanimously prepared to implement extra conventional and unconventional stimulus should such be deemed required in order to keep medium-term and long-term inflation expectations anchored near the bank’s target of below, but close to, 2.0%. 

  • Time and again, the duration of low inflation was underscored as a risk factor.  The longer such goes on, the greater is the downside risk to expected inflation.
  • The adverb “very” was added to a promise that “we will monitor developments very closely and will consider all instruments available to us.”
  • The paragraph containing the above pledge was expanded to also include the following more explicit language dealing with forward guidance:
    • We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.
  • Greater stress was placed on the euro’s performance, not as a policy target per se (which it is not) but rather, as an important determinant influencing medium-term to long-term price expectations.  It seems that further euro appreciation or even its failure to settle back somewhat might be sufficient to trigger extra stimulus or to affect other variables that could do so.

While officials discussed a rate cut and some unconventional tools, the decision was to await more data pertaining to long-term expected inflation and actual inflation.  Draghi admitted that the Council had underestimated the decline of inflation, including in March, and that anticipated disinflationary factors last month, including base effects caused by the different timing of Easter do not fully explain the incremental disinflation seen last month.  Draghi’s introductory statement unusually mentions the Council’s forecast for April inflation: “Annual HICP inflation is expected to pick up somewhat in April, partly related to the volatility of service prices in the months around Easter. Over the following months, annual HICP inflation is expected to remain low, before gradually increasing during 2015 to reach levels closer to 2% towards the end of 2016.”  It seems that short of reversing the surprise on the downside in March, April data could be the final straw before pulling the string on more stimulus.

In other highlights, Draghi defended the success of its forward guidance against critics by noting the stability of the yield curve in a period that otherwise would have been volatile.  He noted, too, that the rise of deflation hasn’t risen since last month but that the persistence of low inflation is in itself a risk factor for prices.  On growth prospects, he touted continuing real-side improvement, noted that plenty of economic slack remains, and discussed the difficulty of quantifying the size of the so-called output gap.  Growth risks are still skewed to the downside because of geopolitical factors as well as ongoing public- and private-sector balance sheet adjustments.  “A cross-check with the signals from the monetary analysis confirms the picture of subdued underlying price pressures in the euro area over the medium term.”  But the baseline view remains that price risks are balanced overall. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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