ECB’s First Policy Meeting of 2018

January 25, 2018

The January meeting of the ECB Governing Council, the first of eight scheduled policy reviews in 2018, resulted in a consensus to leave all policy settings unchanged and the publication of a statement whose appraisal of the euro area economy and guidance to future policy can be best summarized by the fourth paragraph:

Incoming information confirms a robust pace of economic expansion, which accelerated more than expected in the second half of 2017. The strong cyclical momentum, the ongoing reduction of economic slack and increasing capacity utilisation strengthen further our confidence that inflation will converge towards our inflation aim of below, but close to, 2%. At the same time, domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend. Against this background, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability. Overall, an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term. This continued monetary support is provided by the net asset purchases, by the sizable stock of acquired assets and the forthcoming reinvestments, and by our forward guidance on interest rates.

The structure of current central bank interest rates — a zero percent refinancing rate flanked by a negative 0.4% deposit rate and a positive 0.25% marginal lending facility rate — will be maintained well beyond the end of quantitative stimulus. A possible further rate cut risk had until last June been noted but was dropped in that month’s review. The ECB is purchasing sovereign debt at a pace of EUR 30 billion per month and will continue doing so until September. No indication has been given about quantitative stimulus beyond September other than to say that policy thereafter will hinge upon whether “a sustained adjustment in the path of inflation consistent with its inflation aim.” (Market players have lately been more inclined to think that asset buying will end in September.) In any case, officials signaled that the principal of maturing debt will continue to be re-invested even after new bond buying is halted.

Officials remain upbeat about the outlook for growth. Staff forecasts updated last meeting in early December projected a 2.3% rise of real GDP this year, then 1.9% in 2019. There is some concern about the rising euro, but all in all, risks to growth are considered balance. CPI inflation, as the above excerpt notes remains too subdued, especially on a core basis. Inflation is projected to increase in response to the stimulative monetary policy and GDP rising faster than than its potential trend and therefore shrinking the output gap and causing wage growth to pick up.

ECB President Draghi’s press conference was overshadowed by news coming out of the World Economic Forum in Davos. Officials from the U.S. official delegation have taken a page from former Treasury Secretary Connally who in 1971 asserted that while the dollar is America’s currency, it’s Europe’s problem. Draghi in conference complained about U.S. official verbal meddling to weaken the dollar. The euro is currently just south of $1.25, having earlier today hit a peak of $1.2538, its priciest level since the last month of 2014.

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



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