It would go too far to call this the Americanisation of the Eurozone. But the outcome of today’s ECB meeting showed some imitations of last night’s presidential debate in the US; at least in terms of memorable statements. Whether it is on tapering, the extension of QE or solutions to the scarcity problem, the ECB is keeping everyone in suspense. At least until the December meeting.
The macro-economic situation has not changed since the September meeting. If anything, the data released since then has rather confirmed the ECB staff’s projections of a gradual, but weak recovery and not so much of the short-term worries the ECB’s Governing Council seemed to have had in September on the back of a couple of disappointing data releases. As in earlier meetings, the ECB stressed that risks to the growth outlook were still to the downside. As regards inflation, Draghi confirmed the earlier view of a gradual increase of headline inflation. At the same time – very important for monetary policy – he remarked that the convergence of headline inflation to the ECB’s objective should be sustainable and self-sustained. This in our view is a clear hint that the ECB would tolerate inflation over-shooting in the future if it was driven by higher oil prices. Keep a close eye on what core inflation is doing in the coming years.
During the press conference, ECB president Draghi tried to dodge the most interesting questions regarding the extension of QE, a possible tapering and solutions to the asset scarcity problem. An often-heard answer to a variety of related questions was “we didn’t discuss this today”. Instead, Draghi tried to divert all expectations to the December meeting. This is when ECB staff will present its latest economic projections, which will include the first 2019 forecasts, and when the ECB’s committees have finalized their work on technical options to tackle the scarcity problem. Draghi’s comment that the December meeting will determine monetary policy for the following weeks and months sounded promising and should increase expectations. But isn’t determining monetary policy for the next weeks and months what every single ECB meeting does? What Draghi actually did say was that QE was not forever but that an abrupt ending to bond purchases was unlikely.
In sum, what are the take-aways from today’s meeting? In our view, the ECB is not yet ready to extend QE. The recovery of the Eurozone economy is not weak enough to justify more stimulus but also not strong enough to light-heartedly talk about tapering. This is why the ECB is simply buying time. Mario Draghi’s elegant balancing between tapering and an extension of QE keeps all expectations alive and could have one welcome fall-out: slightly higher long-term rates which will bring some relief to the scarcity problem without panic. At the December meeting, our view is that the ECB will announce an extension of QE until the end of 2017, possibly at a slower pace than the current 80bn euro.