ECB: Aligning forward guidance to strategic review outcome

When ECB meets next week, the market attention turns to the implications and new communication on the back of the new strategic framework. We do not expect new policy signals coming from the change in language.

We expect an acknowledgment of the improving data which has come in according to expectations and the positive contribution from the roll-out of the vaccines, however, risks will also be mentioned, notably, the by-now dominating Delta variant with a reference to still uneven and fragile recovery.

With markets having to adjust to the new communication style and potentially also new language, there is risks of larger than usual market moves, although such moves should not be over-interpreted, especially in a less liquid seasonal summer market.

We expect new policy signals after summer on issues such as bond-buying but are open for TLTRO liquidity operations to be coined standard already at the upcoming meeting.

Adjusting to the new target without addressing the root-cause

In Flash: ECB Research - Strategic Review: Striving for symmetry, 8 July, we outlined the changes to ECB new policy framework, which now is for a symmetric inflation target around the 2% level over the medium term. As the outcome of the strategic review resulted neither in the development of new monetary policy tools that could foster the achievement of the inflation target nor changed its explicit target variable of HICP at 2%, we do not see the probability of ECB meeting its inflation objective altered by the strategic review.

For ECB the conundrum remains that underlying inflation pressures remain anchored at a too low level and without the support from other policy areas (namely fiscal policy) in a coordinated manner, ECB will continue to face challenges in living up to its inflation target in our view, be it defined as below, but close to, 2% or just 2%.

As a result, we believe that next week’s meeting will mostly be focused on aligning a new, more concise ‘narrative-based monetary policy statement with the ‘old’ introductory statement and it will therefore be difficult to read it as either a more dovish or hawkish communication than the June statement. Wording could be focused on tying the rate path more closely to realised inflation, which also would entail tolerating a transitory inflation overshoot, in line with the new framework.

In line, but with risk

We expect ECB to confirm that since the June meeting the economic data has broadly confirmed the baseline trajectory (thereby keeping the growth risk assessment as broadly balanced), although risks from the Delta variant may feature more prominently. We do not expect a reintroduction of the risk to the inflation outlook.

No new staff projections will be released, but we will receive the Survey of Professional forecasters that we know will feature in the discussion as well as the bank lending survey. Regarding the latter, we will closely monitor if the tightening bias in expected credit conditions is set to continue in Q4. 

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