ECB: Less dovish than expected - Natixis

Alan Lemangnen, Research Analyst at Natixis, explains that as expected by them, the ECB staff revised up its macroeconomic projections for the euro area and slightly increased the GDP growth forecast in 2017 and in 2018, while inflation projections have faced substantial adjustments.

Key Quotes

“The core inflation projections were surprisingly revised up from 1.4% to 1.5% in 2018 and from 1.7% to 1.8% in 2019. As expected, volatile components of HICP inflation were revised up significantly, leading to an increase of headline inflation of 40 bps to 1.7% in 2017, 10 bps to 1.6% in 2018 and left unchanged at 1.7% in 2019.” 

“On the back of these new projections, Mario Draghi conducted a mild positive reassessment of the balance of risks on the macroeconomic outlook. In January, risks were “tilted to the downside”. Now, they “[…] have become less pronouced, but remain tilted to the downside”. It was also repeated during the Q&A session that the “balance of risks has improved”. During the Q&A session, focus was made on the positive effects of the current monetary stance. Still, it was re-asserted that conditions for a durable adjustment of inflation are not gathered yet.”

“The forward guidance was adjusted at the margin, less than we expected. Sill, it made this press conference surely less dovish than markets’ expectations. First, the reference to “all instruments” in the introductory statement was removed, meaning that if the ECB intends to act more, it would do so by using the APP and not its policy rates. Second, Mario Draghi did not close the door to a change in the guidance of interest rates, suggesting that the reference to lower rates is not set in a stone. Third, no additional TLTRO II operations were announced. We suspect it was made on purpose to boost the demand for the last operation on March 23 but, this points still towards less credit easing.”  

“To sum-up, the ECB has become slightly more hawkish today, adjusting its forward guidance at the margin on the back of mild positive rebalancing of risks. This is in line with our call that the ECB will announce the recalibration of the APP in September. In the meantime, we expect next meetings to focus mainly on the rebalancing of risks before, maybe, a more substantial adjustment in the guidance – probably in June.”