Next week’s ECB meeting should be one of these very few meetings for which a press conference is dispensable. In fact, it will probably be a meeting for which some ECB officials or ECB watchers might even regret having ended their vacations for. If they had any. After the December decisions, the ECB will in our view stay on autopilot, at least until the summer.
Solid momentum continues. If anything, the Eurozone economy has gathered momentum towards the end of last year. The European Commission’s economic sentiment indicator climbed to its highest level in almost six years and hard data for November was also positive. Interestingly construction, which lagged the Eurozone recovery for a long while, is finally catching up.
Headline inflation surged. While the recovery has gathered momentum, headline inflation picked up significantly in December, providing further ammunition for the few ECB hawks. At the same time, however, core inflation in the entire Eurozone remains low (0.9% YoY in December) and has even declined in several countries. So far, the increase in headline inflation is mainly due to fading base effects.
Still with a dovish base. The minutes of the December meeting indicated that the ECB still has a dovish base. However, there were first signs of a somewhat more optimistic take on the economic outlook, reflected in terms like “a more balanced risk assessment” and a “possible emergence of upside risks to the outlook for growth and inflation”.
No reason to adjust, though. Despite the slightly improved outlook for growth and inflation, only six weeks after the decision to extend QE until the end of 2017 there will be very little appetite for the ECB to adjust the programme again. On the contrary, the December decision has put the ECB on autopilot at least until the summer and until after the Dutch and French elections. This autopilot should also immunise the ECB against short-term volatility in macro data. The fact that there is no need for adjustment is supported by the minutes of the December meeting. Even though the ECB Governing Council was slightly divided on how to extend QE, outright opposition against QE still looks very limited. Formulations like “few members” opposed an extension of QE “in view of their well-known general scepticism” does not really suggest that this opposition is taken extremely seriously. ECB president Draghi will probably point to low core inflation and the need for a sustainable improvement of the inflation outlook when confronted with higher headline inflation during the press conference.
Looking beyond January. There is little to no room for any kind of monetary policy action at next week’s meeting. However, given that headline inflation should continue upwards in coming months, ECB hawks will probably get more vocal with their plea for a faster unwinding of QE. At least when it comes to the argument of deflationary risks, the hawks do have a point. These deflationary risks have definitely disappeared. However, the disappearance of deflationary risks does not automatically mean that inflationary risks are on the rise. In fact, it needs much more than only a couple of energy-driven headline inflation increases to change the minds of the broad majority in the Governing Council. In our view, the ECB will want to see a pick-up in core inflation and political certainty before it would announce a further reduction of the monthly bond purchases. We shouldn’t see such a scenario unfolding before the second half of the year.