Carsten Brzeski's blog

ECB meeting: Dovish with a hawkish blend

The ECB kept all interest rates unchanged at today’s meeting. During the press conference, Draghi presented a dovish message but did not forget to throw some bones to the hawks.

In short, today’s main message from the ECB was: the economy looks a little bit better, there are still no signs of durable inflation and we are not changing anything now. This compressed message was the result of a slightly better assessment of the Eurozone economy than in January. The ECB acknowledged the strength of the recovery and referred to sentiment indicators suggesting “that the cyclical recovery may be gaining momentum”. Still, the risks to the growth outlook were still tilted to the downside, even though the ECB for the first time called them “less pronounced”. This moderately positive outlook was also reflected in the latest staff projections, which showed GDP growth at 1.8% in 2017, 1.7% in 2018 and 1.6% in 2019.

Regarding the recent increase in headline inflation, the ECB repeated that it would “look through changes in HICP inflation if judged to be transient”; a clear signal that the ECB considers the current increase in headline inflation a temporary phenomenon. This view was supported by the staff projections, which envisaged annual headline inflation at 1.7% in 2017, 1.6% in 2018 and 1.7% in 2019. Particularly, the 2019 forecast shows that underlying inflationary pressure remains moderate. However, when interpreting the inflation forecasts one has to bear in mind that these forecasts only take QE until the end of 2017 for granted. The 2018 and 2019 forecasts should technically have been made under the no-policy-change assumption, ie no more QE (as no decision has been taken).

Up to here, Draghi had struck a very cautious tone, emphasizing that the ECB saw the slight improvement in the recovery but did not see any upward pressure on inflation, yet. Here, Draghi also introduced a new key variable for the coming months: wage growth. Draghi called this “the linchpin”. Therefore, it did not surprise that other key sentences like interest rates are expected “to remain at present or lower levels for an extended period of time” or that the ECB stands “ready to increase our asset purchase programme in terms of size and/or duration” were still in place.

So far, so dovish from Draghi. In the course of the press conference, it almost seemed as if some hawks were sitting under Draghi’s desk and were fiddling with his papers. On some critical questions, Draghi needed more time to find his notes and arguments than usually. It was probably no coincidence that his answers became a bit more hawkish. He threw some bones to the hawks by stressing that the ECB no longer had a sense of urgency of taking further actions and that no fresh TLTROs had been discussed. Draghi even dodged the question on whether the ECB might raise interest rates before the end of QE.

All in all, the ECB keeps its easing bias but has also started to gradually incorporate some hawkish sounds. This strategy is preparing the grounds for a tapering announcement after the Dutch and French elections if growth and inflation follow their current paths, but keeps all options open if the current optimism turns out to be unjustified.