At today’s meeting, the ECB adjusted its forward guidance. Whereas the message in the monetary policy statement to date has been that key Eurozone interest rates would remain at their current levels until at least through the end of 2019, this timeframe has now been pushed back to the middle of next year at the earliest. In other words, the guardians of monetary policy are factoring the current risk factors (trade dispute/ Brexit) into their overall European economic outlook. The circumspect stance of the central bank is also reflected in the revised ECB staff projections. The growth outlook has been revised downwards slightly for both the 2020 and 2021 time horizons. At the same time, Draghi was keen to avoid coming across as overly pessimistic. For example, he also pointed in this context to the positive development of the Eurozone labour market.
Inflation projections were adjusted only slightly. One striking aspect is that the longer-term outlook (2021) has remained unchanged. The market has recently exhibited doubts over whether the ECB can achieve its own inflation target, and Draghi was energetic in his dismissal of such fears. In his view, there are no deflationary threats on the horizon right now. What’s more, he considers the probability of a recession to be low. At the same time, however, the ECB President also stressed that the bank had a significant armoury to call on in the event of such a scenario looming. Both a rate cut or the resumption of the asset purchase programme were mentioned as perfectly feasible potential courses of action, and Draghi reiterated the point that the ECB’s legal framework left all options open to it.
Another aspect of today’s meeting of the Governing Council was the announcement of the precise conditions of TLTRO III transactions. Compared to previous long-term tenders, the interest bonus is rather less generous this time at a maximum of 30 basis points. In view of market reactions, it appears that market participants were hoping for the ECB to be rather more “dovish”. Hopes of a possible interest rate cut were somewhat dampened down. Nonetheless, the ECB remains dependent on external risks. In the light of recent geopolitical developments, any subsidence of these risks remains in the realm of hope rather than expectation.