28th April 2017
Today begins the 6-week journey, no doubt filled with conflicting messages, unsubstantiated facts and back-biting before the next ECB meeting… no sorry, UK General Election (another discussion for another time). That said, on both fronts we are likely to witness high-conviction debate surrounding the pro and cons of either maintaining the status quo or rocking the monetary policy/political boat. Yesterday in Frankfurt we heard Draghi offer a glimmer of hawkish rhetoric to appease the more hawkish members of the Governing Council by mentioning that the cyclical recovery in Europe is becoming “increasingly solid”, and that downside risks were “moving toward a more balanced configuration”. These few words marked a change, albeit minor, that pushes the fixes the focus on the 8th June meeting, and possible bolsters expectations for something new from Draghi in the near-term. Crucially, the Governing Council held back from tweaking the wording in the monetary policy decision statement, a move that would likely start the ECB on the slow road to policy normalisation.
To date though, the facts would seem to speak for themselves – European manufacturing and services output is bounding along at the fastest pace in six years, inflation is beating expectations in many key European countries (April prelim CPIs: Germany +2.0% y/y vs +1.9% cons, Spain +2.6% y/y vs +2.5% cons, Eurozone +1.9% y/y vs +1.8%, with core CPI +1.2% y/y vs +1.0% cons) and wage growth have “picked up slightly from very subdued levels” according to Draghi, adding that the outlook remains uncertain. Indeed, today’s update from the ECB’s survey of professional forecasters painted a more optimistic outlook for both inflation and GDP. That said, Draghi was keen to voice the need to “look through transient developments in HICP inflation, which have no implications for the medium-term outlook for price stability”. He believes that headline inflation will pick up in April, as seen so far, and “hover” around current levels until the end of this year.
So, we have 6 weeks of noise ahead. Forthcoming ECB speeches will have the usual headline risk despite Draghi saying that the policy decision was unanimous. Core ECB members have no control over the views of more outspoken/peripheral members, nor over their responses to questions from the media in between meetings. Public dialog and media Q&A will no doubt reveal the underlying spectrum of views that make up the ECB’s collective wisdom. Indeed, less than twenty-fours after the Governing Council meeting the ECB’s Vasiliauskas has already said that, “even after QE tapering, it will probably be inappropriate to expect interest rate hikes”, while this is broadly similar to comments he made on April 6th it is perhaps premature for ECB watchers to view a tweak to the June statement as baked in – despite such a move being widely touted in much of the pre-meeting bank research. Between the March and April meetings, members like Nowotny, Hansson and Knot were particularly vocal about their preferences for the future direction of monetary policy, and it took multiple comments from Praet, Draghi, Constancio (and to a certain extent Villeroy) to steady the ship and preserve the core view of the Governing Council. Draghi said they did not have any discussion around policy exit strategy at Thursday’s meeting and reiterated that they saw no need to deviate from their indicated path of policy at present – but one would assume that just because a formal discussion point was not tabled by Praet, there would no doubt have been side-line discussions on the topic. We await the April ECB accounts on Thursday 18th May and a post-meeting flurry of ECB speakers to add more pieces to the puzzle.
ECB Monetary Policy Decision
ECB Press Conference + Q&A
Author: Michael Read