No big change from the ECB

Last week’s ECB meeting concluded, as expected, with the central bank leaving its key interest rates unchanged at -0.4% for the deposit rate and 0% for the refinancing rate.

There was also no change to the plans for its asset purchase programme which will run until the end of December 2017, or beyond, if necessary. There had been a lot of speculation in the lead up to the meeting that the ECB may remove or row back on its easing bias in relation to its asset purchase programme.

However, the text stating that the ECB stands “ready to increase our asset purchase programme in terms of size and/or duration” was left unchanged.

In the accompanying press conference, ECB president Mario Draghi outlined the rationale behind this decision.

He stated that the “last thing the Governing Council want is actually an unwanted tightening of the financing conditions” that “either slows down or may even jeopardise” the progress of reaching a sustained path towards its 2% inflation target. He also emphasised that inflation is “not where” the ECB wants it to be or “where it should be”.

Meanwhile, the meeting statement referenced the fact that “measures of underlying inflation remain overall at subdued levels”.

Therefore, based on this analysis, the ECB remains of the view that a “very substantial degree of monetary accommodation is still needed” for it to achieve its price stability objective. The ECB continues to take confidence from recent macro data regarding the performance of, and outlook for, economic growth in the eurozone.

Mr Draghi commented that “we are finally experiencing a robust recovery” and that “incoming information confirms a continued strengthening of the economic expansion” in the region. The eurozone economy grew by an impressive 0.6% in the first quarter of this year. Survey indicators of activity suggested growth continued to gather pace in the second quarter.

The ECB is forecasting GDP growth of 1.9% this year and 1.8% in 2018. Given recent macro data trends, though, we would not be surprised to see growth hit 2% or above this year and next. Meanwhile, the ECB expects headline inflation to average 1.5% this year, 1.3% next year and for 2019, inflation is forecast to average 1.6%.

Overall, it is clear from the July ECB meeting that the Central Bank is erring on the side of caution and allowing itself flexibility as it assesses its move away from an easing policy bias towards a more neutral policy stance.

Indeed, in the words of President Draghi, the ECB needs to be “persistent and patient” in its implementation of its monetary stimulus. He repeated his assertion that the ECB will be in the “market for a long time” to achieve its price stability objective. It seems apparent then that any tapering of its QE programme, which may begin in 2018, and withdrawal of monetary stimulus is likely to be very pedestrian in pace.

John Fahey is senior economist with AIB


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