The ECB minutes confirm the ECB’s very gradual shift from a very easing bias towards a mildly easing bias.
The just-released minutes of the ECB’s March meeting confirmed ECB President Draghi’s remarks at the press conference acknowledging a more optimistic growth forecast, while remaining cautious on any changes to monetary policy. According to the minutes, the majority within the ECB Governing Council considered it too early to let the current easing bias go. Apparently, some members had argued in favour of removing the downward bias regarding interest rates. This is the phrase known as “The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time”. However, these views were overruled as “changes in the formulation at the current juncture could lead to an undue upward shift in market interest rates and tighten financial conditionals to an extent that was not warranted by the prevailing outlook for price stability”. In our view, ECB president Draghi had effectively dropped the bias for rate cuts last year when he noted that the Governing Council “doesn’t anticipate that it will be necessary to reduce rates further”.
An interesting detail of today’s ECB minutes was the discussion on the inflation outlook. Here, several ECB members were concerned that the inflation outlook, particularly for core inflation might be too optimistic, given that this expected increase was conditional on wage growth. According to the minutes, the ECB currently does not see any signs of wage increases.
In the same context, it is in our view good to remember that the ECB’s inflation forecasts for 2018 and beyond probably had to be made under the so-called “technical no-policy-change assumption”, ie. QE stops at the end of 2017. Given that the latter is unrealistic, even tapering in 2018 should lead to higher inflation forecasts for 2018 and 2019.
After the March meeting, some market participants had got carried away, starting to speculate about an earlier end to QE and even a rate hike in 2017. It was like the reaction of dehydrated traveler in the desert who starts seeing fountains of water once he feels a drop of water. Earlier today, ECB president Draghi had one of his few public appearances, clearly attempting to calm the situation. Draghi reiterated the March view that inflation in the Eurozone was not strong enough to signal any change in monetary policy. Later today, ECB chief economist Peter Praet is expected to repeat this message.
Today’s speeches and the minutes of the March meeting should finally bring some structure and discipline in the latest polyphony and sometimes even cacophony of different and diverging ECB sounds. Even though the ECB acknowledges the improved prospects for the Eurozone economy, it is in no rush to alter its monetary policy stance. As long as neither core inflation nor wages are moving northwards, the ECB will hold still. Also, it seems as if most ECB members have a clear preference for keeping rates on hold until (well) after the end of QE. Having said this, we expect some subtle changes from the ECB in the course of the year.
There won’t be any at the April meeting though, which will take place before the French presidential elections. However, after the elections (ie at its early-June or late-July meeting), the ECB could give its first hints at tapering in 2018, referring to reduced deflationary risks. Tapering could come piecemeal-wise, reducing the monthly purchases from one ECB meeting to the other, without precommitting to an official deadline. This could give the ECB more flexibility to revamp QE if need be. To move from tapering to a first rate hike, however, would require higher inflation rates, a pick-up in wages and a further strengthening of the economic recovery. Having said this, the possible exit sequencing (a rate hike before or only after the end of QE) is likely to remain a subject of market speculation for a while. In our view, the ECB’s preferred option is still not to change interest rates before the end of QE. However, if further down the road, the ECB can convince markets that a deposit rate hike does not mark the start of a normalisation cycle, the current aim at sequencing is not set in stone.
All in all, the minutes as well as Draghi’s comments show that the ECB does not feel as if it has to move any time soon. Still, under the surface, a very gradual shift is taking place. Even if it is currently only moving from an extremely to only mildly easing bias.