The research team at Rabobank notes that the ECB left both interest rates and the asset purchases programme unchanged while the Governing Council upgraded the risk assessment for growth slightly, but reiterated that the (more important) inflation risk assessment remained unchanged.

Key Quotes

“The Governing Council is trying to sound somewhat more optimistic as the year progresses, without immediately startling markets. Meeting again confirmed that the ECB will only take ‘baby steps’ when it changes its communication on the outlook for monetary policy.”

“We believe that this suggests that going forward, the ECB is likely to first only adjust its risk assessment for growth again (but this time to “broadly balanced”), before considering an upgrade of the inflation risk balance. Further upgrades of the growth outlook and/or risk assessment could come as early as June, backed by new growth estimates. We believe these growth estimates could indicate further reduction of the uncertainty surrounding the outlook – and especially the downside risks to growth, given that growth has so far turned out to be more robust than previously expected.”

“Meanwhile, the Governing Council is not yet convinced enough to also upgrade the inflation risk assessment, which also has clear implications for the Council’s stance towards the ECB’s forward guidance.”

“President Draghi confirmed that the ‘easing biases’ communicated in the ECB’s forward guidance relate solely to inflation: “They are meant to cope with tail risks concerning the inflation rate, not growth.” As such, it is highly unlikely that the phrasing of forward guidance will change before the ECB upgrades its risk assessment for the inflation outlook from “downside risks”. Only when the Council can sound more optimistic on the outlook for inflation –i.e. when a similar, gradual change of tone in the inflation risk assessment is presented– do we expect the ECB to reassess the “or lower” phrasing in its forward guidance.”

“Not only did Draghi’s press conference clarify the order in which the ECB’s language will change, President Draghi also reiterated that the sequence in which unconventional policies will be wound down is currently not up for discussion. At this time, the Council does not see any reasons to deviate from the order described in the forward guidance (i.e. tapering the asset purchases before hiking the deposit rate). In our view, the fact that Draghi did not want to go into too much detail when asked questions on potential changes to this order, only confirms that the Governing Council wants to stick to the current sequence of tapering before rate hikes for now.”

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