The geopolitical risks have risen of late. The ECB is also aware of this and therefore resolved to go on hold at the last Council meeting. At the press conference, however, President Draghi indicated that the ECB was essentially aiming to gradually bring monetary policy back to normal. The ECB President is therefore still confident that the inflation rate will approach its target value in the medium term. He appears to have struck the right balance in his choice of words, preparing a gradual departure from the current monetary course without nurturing fears of a drastic change in policy.
President Draghi remains upbeat about the outlook for the European economy. Although the latest data do indeed suggest a slowdown in economic growth, this is mainly due to the above-average growth rates of recent quarters. The economic prospects can still be termed solid. The monetary officials are therefore confident that inflation will pick up in the medium term. Nevertheless, they recommend keeping a very vigilant eye on economic developments – thereby hinting a degree of uncertainty over the ECB’s future course that will preoccupy investors for a while.
New projections on economic and inflation development are to be published as scheduled at the June Council meeting. The monetary authorities will likely use these as the basis for discussing the future direction of monetary policy. If the framework conditions are as they should be (no downward revision of the inflation outlook), the ECB might already make the continuation of the Asset Purchase Programme (APP) no longer conditional on the medium-term inflation outlook at the next Council meeting. This would essentially enable the central bank to allow the bond purchase programme to expire. The decision on whether to continue the debt purchases should be made by July at the latest. Otherwise, with the ECB’s summer recess approaching in August there will be little scope for postponing the decision any longer.
All in all, we expect the bond purchase programme to have expired by year-end. However, the first interest rate hike is not likely to be made until mid-2019. Nevertheless, there has recently been an increased risk of the long-awaited return to monetary policy normalisation beginning even later.