Written exclusively for InTouch Capital Markets
6th March 2018
By David Barwick
(FRANKFURT) – If little else, the press conference following Thursday’s policy meeting of the European Central Bank’s Governing Council seems likely to confirm that “early” is relative and in particular that the early part of the year – at least of this year – isn’t necessarily limited to the first quarter.
That is a possible interpretation of one outcome that currently looks a bit more probable than not: ECB President Mario Draghi will report – as on the last such occasion in January – that monetary authorities expressed awareness during the meeting of “the need to have a discussion” about their forward guidance, and that this discussion is to take place at some point “in the early part of this year.”
Just not today.
For Draghi (and in this regard he is hardly alone on the Governing Council), the process of getting to the point of wishing to send a major new signal to financial markets is not to be rushed, and he has made no secret of some important reasons for the reticence. Nor, in fairness to him and others preferring to go slow, are those reasons inconsistent with the ECB’s stated thinking all along, in which the sustainability of any recovery of inflation is key.
Speaking only last week in Brussels before the Committee on Economic and Monetary Affairs of the European Parliament, for example, Draghi was clearly averse to paint a picture of a situation that would warrant the next major step by monetary policy makers on the path towards normalization.
“…inflation has yet to show more convincing signs of a sustained upward adjustment,” he told parliamentarians, with underlying price dynamics still “subdued.” Uncertainties prevail, he said. And while conceding an improvement in the economic outlook and a consequent strengthening of confidence in prospects for a return to price stability, Draghi nonetheless called for “patience and persistence with regard to monetary policy” and pointedly observed that ample accommodation constitutes a precondition to sustainably restoring inflation.
Heels thus dug in, it is hard to imagine monetary authorities taking any bold decisions in the immediate term.
True, updated ECB staff macroeconomic forecasts, due to be made public at the press conference on Thursday, will be available to the Council as it deliberates, and seem likely to reflect the somewhat rosier outlook that Council members have acknowledged in various statements. However, the projections’ quantitative reflection of the improvement is apt to be small, quite possibly too small at the relevant horizon to provide the hawks present with a useful further argument to press their case.
The qualitative assessment of the outlook is another issue, and one on which Draghi’s camp could finally be forced to cede some ground, though this is hardly a given, especially in light of the protectionist tones emanating most recently from the White House – universally regarded by central bankers as an unmistakable downside risk to growth.
That noise aside, it is bound to strike some observers as a bit counterintuitive that at this point – as since last June – the Governing Council still remains unable to bring itself to do more than characterize the risks to growth as “broadly balanced” despite the visible strengthening of the Eurozone economy.
There is of course method to this obstinate refusal to express optimism, which in a sense buys the ECB time to reflect. But the reluctance, even if it more or less by consensus, is by no means without detractors, and the discussion of whether to explicitly and publicly embrace a less pessimistic assessment of the risks has been a part of ECB policy meetings for some time now.
Over the entire issue of how best to get back to a semblance of normalcy hovers like a warning light the memory of the misstep made by the ECB’s American counterpart as it felt its way down the same path half a decade ago. In the first half of 2013, then-Federal Reserve Chairman Ben Bernanke suggested that tapering was imminent, only to reverse his position dramatically and embarrassingly a few months later. The ECB – which had to undo its own premature policy move once back in 2011 – is keen to sidestep such pitfalls on its own journey.
If communication on Thursday does deviate substantively from that of the press conference following the January 25 policy meeting, then this seems as least as likely to occur during the Q&A as during the introductory statement, which is a model of continuity. Listeners would do well to continue to pay close attention even if Draghi’s introductory remarks appear to be more of the same.
On balance, though, March still seems early for anything major, even if nothing can be ruled out. But assuming little new ground is broken on Thursday and the ECB still intends to indicate the way forward during the first half of the year, there are other opportunities, including in April.
Although ECB staff does not publish updated macroeconomic forecasts in April, the April 26 policy meeting follows closely on the heels of the Spring Meetings of the International Monetary Fund and the World Bank. The IMF will have just published its World Economic Outlook, and virtually all members of the ECB’s Governing Council will have just had the opportunity of intensive exchanges with their global peers.
Some close to the decision-making process think April could prove a key month, especially since the six-week cycle leaves the month of May without a policy meeting. And while monetary authorities’ subsequent gathering – on June 14 – will bring fresh revisions to the staff projections, deferring things all the way to the ninth inning might not sit well with the faction already in favor of a signal on the future of the ECB’s policy measures.
Moreover, June faces a potential additional complication in that the meeting is to take place abroad, in keeping with the ECB’s practice of periodic out-of-town meetings, which are often thought to be inconsistent with major policy moves. Though still early, one could be tempted to wonder whether the plans to hold that particular meeting in the Latvian capital of Riga could be scuttled in view of the turmoil that country’s central bank is currently engulfed in, leaving the Governing Council in Frankfurt after all. The ECB’s website does not specify Riga as the venue, though it continues to state that the meeting will be external and for now no one has indicated any change.
That points to April again. But in general, Draghi does not feel bound by the post-meeting press conference as the only possible venue for a change in tune, and could readily reserve important messaging for another occasion. Flexibility according to circumstance has been a hallmark of his policy approach, and some see him as reluctant – for whatever reason – to alter his tone markedly at the regular press conference.
Caution and patience have been other reliable characteristics of Draghi’s stewardship of Eurozone monetary policy. They have served him well, and it is easy to imagine that as the end of his term looms on the horizon, he is ever more loathe to spoil his track record by rushing things unduly. Thursday’s press conference seems likely to be consistent with that circumspection.