Carsten Brzeski's blog

ECB focuses on the core

ECB minutes confirm easing bias and the ECB’s willingness to look through temporary increases in headline inflation

The just-released minutes of the ECB’s January meeting confirmed ECB President Draghi’s main message that it was too early to consider any withdrawing of monetary stimulus. According to the minutes, most ECB members went one step further and called a possible withdrawal of stimulus potentially counterproductive as “recent encouraging developments in inflation expectations and the prospects for a sustained adjustment in inflation towards the Governing Council’s inflation could be put at risk”. The minutes also echoed Draghi’s official comments regarding the increase in headline inflation, confirming that the ECB was currently willing to look through increases in headline inflation and was rather focusing on core inflation and on wages.

Here are some key statements from the minutes:

On the focus of core and not headline inflation:

“Overall, a very substantial degree of monetary accommodation was needed for domestic inflation pressures to build up and durably support headline inflation”

“Therefore, there was broad agreement to look through recent upturns in headline inflation driven by energy prices, while carefully monitoring potential indirect and second-round effects.”

On the ECB’s continued easing bias:

“It was important to reiterate that the Governing Council remained prepared to adjust its purchase programme in terms of size and/or duration should the outlook become less favourable, or should financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation”

“The Governing Council continued to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”

In sum, the minutes confirm that the ECB does not see any need for an adjustment of its monetary policy any time soon and that it will stick to an easing bias. Looking further ahead, we do see an opening for the ECB to at least announce or hint at 2018 tapering after the Dutch and French elections; i.e. somewhere in the course of the third quarter this year. The argument that all stimulus is needed to avoid deflation will become weaker and weaker and at the same time the pressure from the (German) hawks to start withdrawing monetary stimulus will continue to build. Hinting at tapering would in our view take a heated ECB debate out of the German election campaign, without hurting the Eurozone recovery.