ECB Preview: Draghicomedy of words

With the ECB pre-announcing its asset purchasing program taper at the beginning of November, there is no much on the agenda for the ECB to deliver before Christmas given the economic environment in the Eurozone of late. Christmas present for the people in countries of the Eurozone will be Draghi’s pledge to keep interest rates low for long together with painting economic futures in bright colors. 

The ECB said it will lower the volume of monthly asset purchases to 30 billion EUR from January until September 2018. This commitment to keeping asset purchasing in place is a strong anchor of monetary policy stability for the December meeting and meetings at the beginning of 2018 as well.

It is not expected of the ECB to make any changes to its policy stance at its upcoming meeting on Thursday, December 14. With inflation still dwelling well below the ECB 2% inflation target,  policymakers are rather likely to postpone discussion about the next possible move or any important policy changes of the forward guidance well into 2018.

The ECB is likely to keep its policy stance of keeping interest rates low “…for an extended period of time and well past the horizon of our net asset purchases”, a phrase the ECB is repeatedly adding to its policy statement as it might come up with a rosier economic forecast for Eurozone.

Economic development

The forward-looking indicators like the purchasing managers' indices from across the Eurozone are painting a colorful economic future for the Eurozone. 

Final manufacturing PMI in Eurozone ticked up to 60.1 in November as growth in manufacturing output and new orders climbed to multi-year highs, supporting survey-record job creation.

The good news for the ECB is that the economic activity is picking up across the number of Eurozone countries. German manufacturing PMI in November rose to the second-highest reading since the survey began in 1996 as new order growth was the fastest since March 2010. French manufacturing reached a seven-year high of 57.5 in November as manufacturing output and new order growth accelerated and the rate of job creation rose second-sharpest in 17 years. Italian final manufacturing PMI supported by gains in new orders that reached the highest level in over 17-and-a half years and growth of new export sales and output hit the highest level since February 2011.

Looking at the composite PMI combining the activity in both manufacturing and services sectors, the economic activity rose in the Eurozone, supporting a positive view of the Q4 GDP growth and beyond. The fourth quarter figures are consistent with the Eurozone expanding by 0.8%, while German GDP is expected to rise 0.9%, French GDP is set to increase 0.7%, Spain is to rise 0.8% and Italy by 0.4%-0.5% in final quarter of 2017.

The composite PMI created a solid basis for the ECB to revise its short-term as well as mid-term growth forecasts as fourth quarter has been overly optimistic. We will see if this is enough also for inflation forecast to be revised upwards.

Inflation turning up brings QE to gallows pole

Although headline inflation in the Eurozone is still well below the ECB target the underlying inflation trend has been pointing upwards for some time already. ECB’s super core inflation measures indicate an upward trend since 2017 providing a rationale also for the ECB’s recent taper of its asset purchasing program. 

The ECB Executive Board member recently pointed out, that the November asset purchasing program extension last the last one. Yves Mersch said the market would be wrong to expect another QE extension while Benoît Cœuré said:” I hope that asset purchases will end in September”.

Communication

President Mario Draghi is a skillful communicator and it will be easy for him to maneuver between the questions of journalists at the press conference. He always says only what he wants and thinks it is relevant for the public to know at the time. 

With the economic growth picking up in a number of Eurozone countries, it will be even easier for him to praise the ECB for the policies it conducted at the time of economic darkness.

Draghi will be like Exebeche...“Speaking loud, saying nothing.”