ECB ponders communication changes in homeopathic doses - ING

Peter Vanden Houte, Chief Economist at ING, explains that the minutes of the ECB’s April policy meeting shows that while the ECB is becoming more confident on the recovery, it is wary of signalling to rapidly its exit strategy.

Key Quotes

“We expect communication to change only in homeopathic doses to avoid any “taper tantrum”.”

“The minutes of the ECB’s April meeting show that confidence in the strength of the Eurozone recovery is growing, though some downward risks are still acknowledged, stemming essentially from the external environment and some political uncertainty. Some members already proposed to characterize the risk to the recovery as broadly balanced. As for inflation, there seemed to be a consensus that there were no signs yet of a sustained increase in underlying inflation, especially in the wake of the disappointing wage developments. In this light there was broad agreement that the current monetary policy stance remained appropriate. This also implied that the easing bias was kept in place in the forward guidance, though the point was made that it could be acknowledged that recourse to the options for providing further accommodation was becoming less likely.”

“If the euro area keeps up its momentum and some progress is made in terms of inflation, the forward guidance would also need to be changed. The new staff projections in June, would give the Governing Council more information to be able to take an informed decision in this regard. But for a discussion on the appropriate strategy for policy normalization, it looks as June is still considered to be too early.”

“What transpires very strongly from the minutes is the determination to be extremely cautious in modifying communication. A market upset, like the “taper tantrum” in the US, could cause premature tightening of financial conditions, something to be avoided at this juncture.”

“The minutes corroborate our views on the ECB’s likely exit strategy. We expect the risk to the economic outlook to be characterized as more balanced in the June statement, while June or July could also see a small change in the forward guidance, namely the dropping of the expectation that interest rates could be lowered further. In September, we expect the announcement of the extension of the QE programme until at least June 2018, with at the same time a reduction of the monthly amount purchased (we expect on average a halving of the amount for the period January-June 2018).”