ECB tries to express confidence - Rabobank

The ECB Governing Council upgraded its risk assessment for growth to ‘broadly balanced’ and the interest rates are now expected to remain at present levels for an extended period of time, removing the reference to ‘lower rates’ notes the research team at Rabobank.

Key Quotes

“As we and other market participants had anticipated, the Governing Council upgraded its risk assessment for the growth outlook to ‘broadly balanced’. Additionally, the Council slightly tweaked its forward guidance, by changing the reference to its policy rate expectations. The Governing Council now “expects [rates] to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases”, effectively removing the reference to potentially lower rates.”

“The upgraded risk assessment for growth was accompanied by higher growth forecasts in the new ECB staff projections. For each of the years 2017-2019, 0.1ppt was added to the forecast, which brings the new estimates to 1.9%, 1.8%, and 1.7% for this period.”

“Despite the higher growth outlook, the staff projections did feature a cut in the inflation projections. Inflation is now seen at 1.5% for 2017, (was 1.7%), 1.3% in 2018 (was 1.6%), and 1.6% in 2019 (was 1.7%). This is a cumulative decrease of 0.6ppt for the entire forecast horizon. Despite this pretty substantial downward adjustment, Draghi stated that “nothing has changed”, except for food and energy prices. He added on several occasions that underlying inflation has been and remains “flat and low”.”

“Is it really inspiring confidence?

Mr. Draghi went out of his way to explain the “flat and low profile of underlying inflation”. But we simply need to be patient, as eventually labour market slack should diminish, thus lessening the dampening impact of the current wage developments (or lack thereof) on core inflation. And we need to be confident that the ECB’s measures will be there to support the convergence towards sustainable inflation. That’s the ECB’s storyline. Does it inspire confidence? We are not entirely sure!”

“Giving it a spin

For now the jury is still out. We see a looming risk that over the course of H2 the ECB will be confronted with yet another set of relatively disappointing core inflation and wage data on the one hand, but on the other with increasing pressure to taper QE because technical limits are being reached. PSPP purchases have already been under pressure for a number of member states, such as Portugal, Ireland and Finland. 

Mr. Draghi maintains that the asset purchase program is running smoothly and flexible enough to deal with any setbacks in the future, but we are less convinced. Indeed, we feel it will prove difficult to change the parameters when the time comes, assuming that recovery of the Eurozone economy remains largely intact.”