ECB: reviewing strategy whilst waiting for inflation
|The ECB remains cautious in its assessment of the economic situation characterised by risks still tilted to the downside, although less than before thanks to the US-China trade deal. The message is slightly better on underlying inflation where some signs of a moderate increase are noted. Between now and year-end, the strategy review, which has now been launched, will grab a lot of attention, with markets wondering how it could influence monetary policy. The review is also important from the perspective of climate change: will monetary policy operations take it on board as a risk factor or will ambition even be higher?
Judging by the market reaction, the ECB President's press conference this week was rather uneventful. The Euro Stoxx 50 equity index fluctuated in a narrow range of approximately 0.15% and 10 year Bund yields eased about 1 basis point. The absence of volatility is unsurprising. Firstly, monetary policy is set to remain unchanged for a long time and, secondly, the message about the economy remains cautious. At the December meeting, the assessment was that "incoming economic data and survey information, while remaining weak overall, point to some stabilisation in the slowdown of economic growth in the euro area". Now "[i]ncoming economic data and survey information point to some stabilisation in euro area growth dynamics, with near-term growth expected to be similar to rates observed in previous quarters." The change in the assessment is tiny – "while remaining weak overall" has been dropped – but, importantly, no pick-up in growth is expected in the near term. Moreover, risks remain tilted to the downside although they have become less pronounced as trade-related uncertainty is receding. The Governing Council of course welcomes that "there are some signs of a moderate increase in underlying inflation in line with expectations", although the inflation outlook remains subdued.
With monetary policy locked in a state-dependent forward guidance mode and data moving at a glacial pace, attention is shifting to the strategy review, which has now been formally launched. The scope is huge but in line with its importance. A key question is whether the mandate, whilst remaining narrow – i.e. achieving price stability – will be reformulated. One possibility would be to make it explicitly symmetric. This would require dropping the word "below" in the now wellknown sentence "We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2%". Another possibility would be to set a range within which inflation would be considered in line with the objective. Clearly, such a move would have a significant impact on policy rate expectations and bring the expected first hike forward.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.