ECB leaves monetary policy unchanged and gives no hints at imminent new action
Even most ECB members are likely to label today’s ECB meeting, or at least the subsequent press conference, as superfluous. As expected, the ECB did not change its monetary policy, neither did it give any hints or signs at its future intentions. Even though Draghi denied that the ECB’s monetary policy decisions would react to politics, the fact that today’s meeting came inbetween the first and second round of the French presidential elections clearly tied the ECB’s hands. It simply did not make sense to change monetary policy if in ten days political risks in the Eurozone will either drop further or escalate significantly.
The ECB’s introductory statement was almost a verbatim copy of the one from the March meeting. The only remarkable change was on the risks for the economic outlook. The ECB’s more positive and optimistic take on the Eurozone recovery was reflected in the phrase that “the risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside and relate predominantly to global factors.” During the press conference, ECB president Draghi also remarked that the ECB had been unanimous on toning down the warnings about risks to growth but no one thought that the stronger economy would currently affect the inflation outlook.
For the time being, the ECB seems willing to simply watch the recovery broadening, without altering its monetary policy. Only if and when the stronger recovery starts to lead to higher prices, the ECB looks willing to act. In this context, it was interesting to hear Draghi saying that there were tentative signs of upward pressure in early stages of the pricing chain but that the outlook for wage growth remains uncertain. Remember that back at the March meeting, Draghi called wage growth the lynchpin of a self-sustaining increase in inflation.
In short, today’s ECB meeting was clearly not a meeting to remember. It was a rather superfluous meeting to buy time and keep markets in check. The real action will come in June or July. If by then, political uncertainty in the Eurozone has dropped further, the economy has continued its cyclical upswing and inflation has not slowed down significantly, the ECB is likely to give hints at a gentle exit from its ultra-loose monetary policy. Hints, not action.