Fra BNP Paribas
In line with the European Central Bank’s June press conference, the account of the June meeting was a balancing act.
While acknowledging the improvement in the growth outlook, the ECB highlighted lack of inflationary pressures and therefore the need for a “steady hand” in its policy stance.
The bank’s concern that a sudden change in communication could lead to an unwarranted tightening in monetary conditions was palpable in the account.
We would expect this caution to persist in the near term. But, ultimately, the ECB’s language, we believe, will have to evolve with the economic outlook. The account of the June ECB meeting confirmed the impression that, while moving towards the exit from its current policy, the central bank is acutely aware of the risk that a sudden change in its communication could lead to an unwarranted tightening in financial and monetary conditions and is therefore particularly cautious.
Like the June press conference, therefore, the account appears to be a balancing act: the ECB acknowledges the improved growth outlook while highlighting the need to preserve exceptionally accommodative monetary conditions, on the back of persistently low inflation. The key words in the account, in our view, were a “steady hand” with respect to the monetarypolicy stance.
Restated in Chief Economist Peter Praet’s speech this morning, this expression means to signal that, despite the subtle changes to the language of its forward guidance, the ECB’s monetary-policy stance has not fundamentally changed. In more detail, the account showed a generally “broad agreement” among ECB members on both the economic outlook and its implications for the ECB monetary policy stance and its communication.
Below are the key points from the account:
Monetary policy has proven to be effective in supporting growth.
The economic recovery has become firmer and broader-based. While risks to the downside mainly linked to the global outlook persist, upside risks have become “somewhat more pronounced”, with the result that overall risks are now perceived as “broadly balanced”. The improved growth outlook means that “very adverse scenarios for the inflation outlook had become less likely” and, in particular, deflation risks have “largely vanished”.
At the same time, however, inflation has remained subdued, with “no convincing signs of a sustained upward adjustment”. In line with Mario Draghi’s comments at the press conference, Author: Luigi Speranza Head of European Market Economics BNP Paribas London branch Balancing act No fundamental change in policy stance Overall, “broadly balanced” risks Inflation puzzle the account downplayed somewhat the relevance of the downward revisions to the ECB’s headline inflation projections.
But it also noted that such revisions were puzzling in view of the improved growth outlook, implicitly highlighting a debate on the possible reasons underlying this puzzle. Of note here is that Mr Draghi had returned to this argument in his Sintra speech, concluding that while a number of structural factors might have indeed loosened somewhat the relationship between growth, wages and inflation (commonly referred to as the Phillips’ curve), the ECB remained reasonably confident that the link continues to hold.
In other words, inflation will eventually pick up, albeit more gradually than it was envisaged originally.
Members agreed that the evolving risk assessment called for some changes in the forward guidance, by removing the reference to “lower rates” in the statement. Interestingly, the account reveals a debate on the opportunity to change the forward guidance on QE, too.
In the end, the Governing Council opted to leave it unchanged. The decision reveals again the ECB’s caution, on the ground that “even small and incremental changes in the communication could be misperceived as signalling a more fundamental change in policy direction”. Overall, the account does not challenge our reading of the ECB’s current thinking.
The central bank is becoming increasingly confident on the growth outlook and, while puzzled somewhat by the lack of concrete evidence of inflationary pressure, is gradually moving towards the exit. Given the risk of triggering an unwarranted tightening of monetary conditions, with a close eye on the currency, the process is not linear and the ECB seems to be moving by taking ‘two steps forwards and one step back’.
Against this backdrop, we expect the ECB to remain cautious in the near term, highlighting the need to continue its support for the economy. But as data evolve, the ECB’s language and its monetary policy stance will also have to evolve, and we continue to expect it to announce in September or October a further reduction in its asset purchases effective from early 2018.
