ECB tweaks forward guidance, drops bias towards greater easing
The European Central Bank stopped suggesting on Thursday that it might yet 'up the ante' on its asset purchase programme if needed, but continued to hold out the possibility of an extension in the APP beyond September.
Indeed, what one analyst initially described as a "contradictory" policy statement served to send the euro lower, even as markets waited on events in Washington DC and whether or not the US administration might modify its initial proposals on steel and aluminium tariffs.
"This is slightly odd in our view. Taken by the letter, it means that the ECB potentially is willing to continue buying €30bn per month beyond September, but has jettisoned the willingness to adjust the program in response to a change in economic conditions. [...] In any case, these are word games in the end, and Mr. Draghi naturally will be quizzed on this at today’s presser," said Claus Vistesen at Pantheon Macroeconomics.
However, in his press conference, following the Governing Council's policy announcement, ECB president Mario Draghi described the omission of the so-called easing bias as a "backward-looking" decision.
Following December's GC policy meeting, the statement read: "If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the APP in terms of size and/or duration."
This time around there was no such message, although in its statement the ECB continued to indicate that bond purchases would continue, "until the end of September 2018, 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."
Draghi also indicated that sustained upwards pressures on inflation had yet to materialise, adding that policymakers wanted to see momentum in prices build-up further.
On the subject of international trade, one remark that caught markets' attention was when Draghi mused out loud "if your allies start to impose tariffs on you, who are the enemies?"
Draghi also pointed out the risks which were associated with financial sector de-regulation in other "large" jurisdictions.
Nonetheless, judging by their comments many analysts still appeared to interpret Draghi's remarks as paving the way for an end to bond purchases later in 2018.
"Today's change in the monetary policy statement does not change our view on the policy decision path for the remainder of 2018. We continue to expect that: 1) the ECB will give more precise guidance on the future rate path over the next three meetings, with a first indication in April; 2) the net asset purchases will end in September; 3) the first 20bp increase in the depo rate will take place in December 2018; and 4) by March 2019 we expect the ECB to complete the move away from negative depo rates," said Philippe Gudin and Antonio Garcia Pascual at Barclays Research.
Similarly, economists at BoA-Merrill Lynch stuck to their forecast for a first hike in interest rates come the second quarter of 2019.
Perhaps so, but for now at least the latest ECB staff macroeconomic projections continued to point to consumer prices running below target by the end of its policy horizon, in 2020.
For Olivier Rakau at Oxford Economics, "That hawkish baby-step was accompanied by a barrage of dovishness from Mario Draghi that is meant to prevent financial markets from a premature tightening of monetary conditions. Yet, the ECB president’s rhetoric was also a stark reminder that significant uncertainties remain regarding the inflation outlook that could yet derail or delay further normalisation steps. We expect the ECB to retain a very cautious and incremental approach to policy normalisation."