There was considerable interest in the ECB Council meeting earlier this month to see the impact on its policy stance of a marked pick-up in the pace of growth in the eurozone.
As expected, the ECB key interest rates remained unchanged at –0.4% for the deposit rate and 0% for the refi rate.
There was no change either to its asset purchase or quantitative easing (QE) programme, which is due to run until at least the end of this year and probably beyond.
However, there were some changes to the meeting statement that indicate that the ECB has rowed back somewhat on its easing bias.
Firstly, the meeting statement no longer refers to the possibility that interest rates could be lowered further.
Instead, the ECB said that it expects rates to remain at present levels for an extended period of time.
The second change was in relation to the ECB’s characterisation of the risks facing the eurozone’s economic outlook.
Whereas previously, the ECB described the risks as being tilted to the downside, it is now of the view that the risks to the growth outlook are broadly balanced.
This more upbeat assessment of the economic outlook is reflected in slight upward revisions to the ECB staff economic projections.
It now expects GDP to grow by 1.9% this year compared to 1.8% previously. Its 2018 forecast was also upgraded slightly from 1.7% to 1.8%, while its 2019 projection was left unchanged at 1.7%.
The ECB noted that recent data confirm a stronger momentum in the economy.
GDP grew by an upwardly revised 0.6% in the first quarter, an improvement on the 0.5% and 0.4% rates recorded in the final two quarters of last year.
Furthermore, leading indicators of activity for the second quarter suggest that the pace of growth is continuing to accelerate.
The key eurozone composite PMI averaged 56.8 in April/May, compared to 55.6 in the first quarter. Based on past performance, this is consistent with quarterly growth of around 0.8%.
In addition, the EC Economic Sentiment Index has risen in the past two months to levels not seen since 2007.
Meanwhile, recent national surveys such as the German Ifo, French INSEE and Italian ISTAT indices are also pointing to a firming pace of growth.
Nonetheless, despite upgrading its growth forecasts, the ECB downgraded its inflation outlook for the next three years.
President Draghi stated that this mainly reflected lower market expectations for oil prices. In terms of specifics, inflation is now expected to average 1.5% this year (was 1.7%), 1.3% next year (from 1.6%) and 1.6% in 2019 (was1.7%).
Although the ECB did remove one aspect of its easing bias in relation to lowering interest rates further, the general tone of its message was that policy needs to stay very loose.
President Draghi continued to emphasise that underlying inflation remains subdued and, thus, a very substantial degree of monetary accommodation will be required for some time.
Indeed, Mr Darghi reaffirmed that the ECB remains willing to further expand its asset purchase programme if needed.
He further reinforced this point by stating that the ECB will be in the market buying bonds for a long time and also commented that policy normalisation was not discussed at the meeting.
Markets have been taking on board the ECB’s message. This is reflected in a slightly weaker euro, while bond yields also moved marginally lower.
In terms of rate expectations, markets do not see three-month eurozone interest rates turning positive until early 2020 and still being below 1% in 2023.
Thus, while growth may be picking up, continuing weak inflationary pressures mean that eurozone interest rates are expected to remain very low for a prolonged period of time.
Oliver Mangan is chief economist with AIB
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