Despite weaker incoming economic data, the ECB sees underlying growth momentum consistent with a scenario of an ongoing broad-based economic expansion. It is true that the ECB’s top echelons have gone on record as saying that the economic trend is being affected by uncertainties and fragilities. They conclude, however, that the risks surrounding the growth outlook can still be assessed as broadly balanced. Despite this outlook, participants at September’s Governing Council meeting pointed to the threat of protectionism, vulnerabilities in certain emerging markets and persistent financial-market volatility. By contrast, there was no focus on the turbulence emanating from Italy. Although yields in one large EMU member country had risen, other Euro area sovereign bond markets had not been affected by this. Mario Draghi and his team will revise their assessment of the economic trend in the light of the new ECB staff projections which are due out in December.
The European Central Bank remains confident that the inflation rate is going to converge with its target. It was noted that the disappointing development in the core rate (HICP inflation excluding food and energy) was mainly due to services prices. Governing Council members also pointed out that wage growth has continued to pick up, even though the central bank no longer sees quite such a close correlation between wage growth and inflation. One remark recorded in the new transcript is that the maturity of some of the targeted longer-term refinancing operations would fell below one year in 2019, which could adversely affect the liquidity position of certain banks. Overall, credit growth continued to be assessed positively; but it was also argued that some caution was warranted as regards the potential implications of very easy credit conditions for banks’ capacity to appropriately price and account for credit risk. The Account accentuates that continuity and steadiness with respect to monetary policy are warranted in the current environment.
The minutes of the ECB Governing Council’s latest meeting do not alter our appraisal of the way forward for monetary policy. Like the monetary custodians, we regard the weaker incoming growth readings as constituting a dent in economic activity rather than as the harbinger of a recessionary trend. In our opinion, the eurozone growth scenario remains intact. The ECB will probably therefore adhere to the course which it has mapped out, ending net bond purchases at the end of the year. Precisely because so many market participants are again considerably more pessimistic than the ECB at the moment, there can hardly be any doubt about policy rates being kept at their current levels until after the summer of 2019.