A Trust-but-Verify Approach to ECB Monetary Policy

April 26, 2018

At the third monetary policy review of 2018, members of the Governing Council left all elements of the European Central Bank’s current monetary stance unchanged. A zero percent refinancing rate will continue to be flanked by a -0.40% deposit rate and a 0.25% marginal lending facility rate. Monthly purchases of long-term assets will proceed at a pace of EUR 30 billion per month through September “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.”  Acquired assets have accumulated to over EUR 2.5 trillion, and “principal payments from maturing securities purchased under the asset purchase program will be reinvested for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary.”

In the subsequent press conference, both via the introductory statement and ECB President Draghi’s Q&A session, the obvious loss of momentum in economic activity, demand and confidence was conceded with a positive spin that growth last year had been faster than expected and undesirably so if sustained long term. Growth remains sound enough to be consistent with the the Council’s view that inflation will progress upward towards the 2% target. The desired development that’s still missing is the sign of a sustained upward trend in underlying core inflation. In each month of the first quarter of 2018, on-year core consumer price inflation was 1.0%, just half the medium-term target. Draghi indicated satisfaction with recent wage growth and intra-euro area factors affecting inflation, but he remains concerned about external factors such as the threat of a trade war and the potential for imported disinflation caused by a weakening dollar.

An interesting revelation to emerge from the press conference was that the Governing Council’s discussion was so focused on sifting through the somewhat softer tone of economic data that the meeting didn’t get around to discussing the details of monetary policy or assessing the implications of recent foreign exchange market developments. Being just April, or five months before the end of current strategy of asset purchases, officials didn’t need to publicize what it will do then. In fact, given the high uncertainty of external risks, it was prudent not to commit publicly to what happens after September. It would make sense to defer such guidance to the June meeting or even the one in mid-summer.

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



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