Fra BNP Paribas
What are the chances of a policy change at next week’s meeting? Since late August, we have been forecasting more easing from the ECB before year end and we continue to see December’s policy meeting as the most likely time for an announcement. That said, after the very dovish press conference on 3 September, including the ECB’s acknowledgement that the risks to both growth and inflation lie to the downside, we would not rule out a surprise policy change as soon as next week.
We put the chances at around 40%.
It is important to highlight in this context that an acknowledgement of downside risks to inflation in an introductory statement to a press conference is very rare. In similar circumstances previously, the ECB would typically have changed its policy stance in September in order to be able to maintain a balanced assessment of the risks to inflation ‘taking account of the latest policy decision’.
This suggests to us that the hurdle to more easing is set fairly low at present. Financial and monetary conditions in the eurozone have also tightened, in part due to exchange-rate appreciation (on a trade-weighted basis especially). The ECB has been communicating its view since early summer that an “unwanted” or “unwarranted” tightening of conditions would merit a reconsideration of its policy stance, centred on modifications to its asset-purchase programme (APP). This suggests, again, that the chances of a policy change next week should not be dismissed out of hand. Why wait?
A key reason is that in both September’s press conference and the subsequent account of the policy meeting, there were repeated references to the need for more time to assess whether the impact of economic and financial developments on the eurozone inflation outlook would be “lasting” or prove merely “transitory”. By way of example, September’s meeting account stated that “all in all, it was considered too early to say whether recent external developments would have a material effect on the euro area, but the downside risks had clearly increased and there was a need to carefully monitor developments and policies outside the euro area”.
The uncertainty relates, in particular, to developments in emerging markets, primarily those in China. Again, to quote September’s account, the “interpretation of the latest developments … was very challenging, and more time and analysis were needed to better understand developments and their implications for the euro area from a medium-term perspective”.
The timing of the next batch of staff projections, to be published in early December, also leans towards waiting. It is already clear from September’s press conference and the meeting account that last month’s staff projections did not fully capture the downward pressure on inflation from Downside risks to inflation … Still, a preference for more information … … and tighter financial conditions … … make a case for policy action next week … suggests December is more likely
The ECB does not have to wait for the projections to be published. It has changed policy in the past in anticipation of revisions, including in November 2011, at President Mario Draghi’s first meeting at the helm. Still, given the ECB’s clearly stated preference for additional information before making a judgement on the inflation outlook, it is more likely that it will wait.
Furthermore, when it comes to the timing of key data releases, the bulk of the information that will matter for the ECB’s assessment will be available only after next week’s meeting. As there have been mixed signals on growth and inflation recently, the data flow is important in allowing the ECB to make a more considered judgement as to the outlook. Regarding growth, the account of September’s meeting mentioned signs of “resilience” in the eurozone economy to recent adverse news, but it also described the eurozone growth model as “fragile”.
As for inflation, there is uncertainty over a range of issues, including the dynamics of core goods-price inflation, with the pass-through from prior exchange-rate depreciation having been much smaller than expected to date. The likelihood of divisions on the Governing Council is a consideration as well. Some members of the Council already have doubts about the merits of large-scale asset purchases, period. Others will need convincing that with the current purchase programme not even half-way through, it is time for more. More data and the updated staff projections are probably required in order for a clear majority of Council members to support additional easing.
Can all these issues be tied up as soon as December’s meeting? As mentioned, with inflation risks to the downside and considering the sensitivity to tightening financial and monetary conditions, the hurdle to additional easing is probably quite low. Still, we doubt that a decision to ease policy in early December would receive unanimous backing by the Governing Council. In January, when the APP was announced, there were two objectors. There could be a greater number of dissenters this time around, as several probably favour focusing on the implementation of the existing policy measures. By early December, however, based on the data we expect in the period ahead, there should be a clear majority in favour of additional easing.
The staff inflation projections will be important in this respect. In the absence of more easing, the ECB would probably end up with inflation projections inconsistent with its price-stability mandate over its entire forecast horizon (to end 2017). For the majority of Governing Council members, this would imply an obligation on the ECB’s part to add more policy accommodation. Why attach so much importance to the staff projections? The staff projections are, in theory, merely an input into the Governing Council’s deliberations.
There is no automatic need to change policy in response to revisions. In practice, however, past policy changes and the rationale given for the action have demonstrated their pivotal importance to ECB monetary policy. In addition to September’s inflation projections not fully capturing the downward pressure from oil prices and the exchange rate, we continue to believe that the ECB’s core inflation projections are too high. The gradient of the expected pick-up in core inflation in 2016 and 2017 looks very steep still on the basis of how core inflation rates have evolved in countries much further down the track in terms of closing their output and unemployment gaps (like the US).
Our impression is that the level of conviction in the projections among Governing Council members is low. A potential spanner in the works for easing in December is that, as of March 2016, the horizon for the staff projections should be extended by a year to 2018. The more hawkish members of the Council may use this as an argument for waiting for a reassessment of inflation prospects in March next year. We doubt this would have the support of a majority of Council members, but it is a potential risk to our forecast of policy action before year end.
