ECB remains true to itself

At today’s meeting the European monetary watchdogs changed the “forward guidance” as well as their assessment of the risks for the economic outlook. Unlike in April’s monetary-policy statement, this time there was no mention of the basic possibility of a further interest rate cut. Central bank president Draghi said one of the reasons for this decision was that the risk of slipping into deflation has diminished significantly. With regard to the economic outlook there are growing signs of confidence among the monetary watchdogs. This is also reflected in the fact that the top dogs at the central bank now view the risks facing the economic outlook as largely balanced. But despite these basically gratifying adjustments, speculation that the ECB might soon say farewell to its present ultra-expansionary monetary-policy course has been dampened: the monetary watchdogs bemoan the euro area’s weak underlying inflation.

In the course of today’s monetary policy meeting central bank president Draghi unveiled the ECB staff’s revised projections for growth and inflation. Encouraging here is the fact that the GDP projections were raised by 0.1 percentage points across all time-horizons. On the other hand, the – in some cases dramatic – downward revision of the inflation forecast comes as a shock. The projection for 2018 is still 1.3%, which is 0.3 percentage points (!) below the previous estimate. Central bank president Draghi says one of the reasons for the sluggish inflation is the lack of wage pressure. This is especially remarkable as the unemployment rate in the euro area has fallen continuously in the past few months. But the central bank is still confident that inflation will pick up buoyancy as the production gap in the euro area closes and as the bond-purchasing program also continues to have an impact. It is just a matter of being patient.

For central bank president Draghi today’s monetary policy meeting was to a certain extent a tightrope walk: on the one hand he had to pay tribute to the improved economic setting while at the same time dampening speculation about a gradual reduction of the monetary-policy stimulus. In light of the significant downward revision of the inflation forecasts the doves on the ECB Governing Council are likely to continue to set the tone in the next few months. The monetary policy meeting made no reference to an early exit from the central bank’s ultra-expansionary monetary course. The hawks on the ECB Governing Council will doubtless have to make do with an adjustment of the “wording” for the time being.

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