The ECB left its main monetary policy measures unchanged at the latest meeting of its 25-person policy-setting council on 9 March 2017 and did not decisively shift the tone of its comments to a more hawkish stance despite a rise in eurozone inflation and improving economic growth.
Instead, ECB president Mario Draghi chose to reframe the policy debate, indicating that it was still uncertain that stronger growth would feed through into rising wages and prices. This would argue against any rush by the European central bank to exit its EUR 60 billion a month quantitative easing (QE) programme aimed at boosting growth and lifting inflation.
With deflation no longer a risk, it is now inflation’s turn
With a self-sustained economy recovery not yet adequately visible, the council again signalled (as it has at every meeting since October) that interest rates (including the negative deposit rate) would remain at current or lower levels until well after QE had been completed, currently envisaged for December 2017. So it seems unlikely that a council majority will be ready to decide on tapering QE in June, with September looking more likely.
But the ECB did indicate its confidence that the economic expansion would continue to firm and broaden and that the risks to the outlook had become less pronounced. Draghi highlighted that the risk of deflation had largely disappeared, but also indicated that the current package of measures was still required to cement the success of the recovery, trigger the eventual reduction in slack and set off the subsequent rise in wages and underlying inflation.
Towards mission accomplished
In its latest projections, growth was revised up marginally for 2017 and 2018. Core inflation was revised up for 2019 to 1.8%, as was the annual rate of change of unit labour cost. In all, the projections moved in the direction of ‘mission accomplished’.
Draghi’s acknowledgment of the recovery can be seen as an essential first step in the sequence of communications that will ultimately lead to tapering, while his focus on wages as the linchpin, the critical component in any self-sustaining recovery in inflation, indicated further progress was needed.
Pushing back against any US protectionism
Asked about the (trade) protectionist rhetoric of the new US administration, Draghi insisted the ECB was playing by the rules and was not targeting the euro exchange rate to improve the eurozone’s competitiveness.
He said market forces determined the euro rate and chose to cite conclusions by the US Treasury (albeit under the previous administration) in defence of the European position. He argued the euro was not undervalued, even if the US dollar was overvalued (at least relative to its historical average) and implied President Trump should focus his attention elsewhere.
Written on 9 March 2017