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Blog Carsten Brzeski

Draghi’s serenity

Today’s ECB meeting can quickly be filed away under “non-event”. As expected, the ECB did not announce any changes to its current monetary policy stance. After ECB president Draghi’s comments at the press conference, a drastic change in the coming months also looks highly unlikely. However, we continue seeing the ECB adjusting its QE programme before the end of the year.

As expected, it was simply too early for the ECB to change anything. Back in July, the ECB was still in “Brexit shock” and was implicitly expecting a sharp worsening of the economic outlook. The data up to now, however, have not confirmed this view; at least not when it comes to the ECB staff projections. These projections, which in March and September are real staff projections and not just the aggregate of the national central banks’ projections, were basically unchanged from June. ECB staff now expect GDP growth to come in at 1.7% in 2016, 1.6% in 2017 and 1.6% in 2018, from 1.6%, 1.7% and 1.7% respectively in the June forecasts. As regards inflation, ECB staff now expect headline inflation to come in at 0.2% in 2016, 1.2% in 2017 and 1.6% in 2018. As Draghi stressed several times during the press conference, these projections are conditional on full implementation of all announced monetary policy measures so far.

While these staff projections still paint a picture of a gradual recovery and a gradual increase of inflation, the assessment of the Governing Council sounded much more cautious. This caution was probably driven by recent disappointing data, which came too late to be taken into account for the staff projections. Like, for example, the drop in sentiment indicators and industrial production in Germany. It was, in our view, this discrepancy and uncertainty between the Governing Council’s macro assessment and the staff projections which explains today’s standstill on monetary policy. There is simply too little evidence of any post-Brexit impact on the Eurozone to justify additional monetary stimulus. Obviously, this could change.

The only door which Draghi opened at today’s press conference was the door to technical QE changes. Even though he did not explicitly use the word “scarcity”, the ECB finally seems to have become aware of the fact that it might be difficult to find enough sovereign bonds to purchase, given the extreme-low rate environment. This is why the Governing Council had “tasked the relevant committees to evaluate the options that ensure a smooth implementation of the purchase program…the committees have full mandate. They will look at all the options that might be used to redesign the program”. This was a clear hint that the ECB will announce technical changes to its QE purchases at the October meeting, which is a prerequisite to any extension of QE beyond March 2017. The two most likely options to tweak the QE programme would be to either increase the threshold of purchase limits per issuance from currently 33% to (for example) 50%; or to drop the deposit rate floor.

The ECB seems to be in no hurry to go wild and decide on new bold measures. Persistently stubborn low core inflation rates and the fact that significant fiscal stimulus will probably only come after the Dutch, French and German elections, suggests that the ECB will eventually be forced to extend QE, at least until the end of 2017. The next ECB meetings should be more exciting than today’s.