Fra BNP Paribas:
Eurozone: ECB in no hurry to ease further; PMI to edge up in April The ECB’s latest communication made it very clear that it is focused on the implementation of existing policy measures rather than contemplating new ones. Indeed, in an unusual departure, the press release prior to the press conference included more than just the announcement of unchanged policy rates.
It added that “The focus is now on the implementation of the additional non-standard measures decided on 10 March 2016.” This theme continued during the press conference, with the need for patience prominent and questions on helicopter money and the possibility of buying equities given short shrift. With the CSPP and the first TLTRO II going live in June, there is plenty to keep the ECB occupied.
Helicopter money was described as “fraught with operational, legal and institutional” difficulties and has “never” been discussed according to ECB President Mario Draghi. Given the political criticisms of the ECB recently, this stance is understandable. As expected there was emphasis from the ECB on the need for other policy areas to contribute “much more” decisively. In a rather adept fashion, the ball was put in the politicians’ court, with Mr. Draghi stressing that while the ECB’s policies are working, it takes time and the process could be sped up if accompanied by more structural reforms. Moreover, the more criticism of the central bank there is, the more the recovery might be held back.
There was also a partial reboot of the communication on policy rates. In the Q&A on 10 March, Mr. Draghi said “we don’t anticipate that it will be necessary to reduce rates further” and “more and more the emphasis will shift from rates instruments to other, non-conventional instruments”. Both statements were conspicuous by their absence this month.
Rather, the message was rammed home that “all” policy instruments within the mandate would be considered if, for example, financial conditions tightened. While the door was therefore left a bit more open to lower policy rates than on 10 March, as we thought it would be, we doubt there is much room for manoeuvre. The meeting account for March, for example, suggested the lower bound was close at hand. Also, while it was stated in the Q&A that the experience of negative rates had been broadly positive, the “extent” was important.
We remain of the view that the most probable next policy step is an extension of the reference date for the asset purchase programme, with September the most likely timing. In terms of data, on Friday Markit will release the ‘flash’ eurozone PMI survey results for April. We expect the composite PMI for activity, a coincident indicator of GDP growth, to have ticked up slightly, from 53.1 to 53.3 as confidence is likely to have benefited from a recovery in equity markets over the month. If confirmed, composite PMI will remain almost 1 point below its average recorded over the previous quarter, suggesting that the economy is starting Q2 on relatively weak footing. This supports our view that eurozone economic growth will slow in Q2. We expect GDP to have grown by 0.4% q/q in Q1 and 0.2% q/q in Q2.
