ECB will be pressured on Dovish guidance - AmpGFX

The analysis team at Amplifying Global FX Capital notes that over recent weeks, Key ECB Council members discouraged thoughts that the ECB would shift its QE and rates policy guidance in the meeting this week, countering some comments from ECB member policy hawks in late March that they might support a shift in guidance.

Key Quotes

“The key phrases in the introductory statement to the press conference currently in place are:

“We continue to expect [key interest rates] to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.”

“If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.”

“The risks surrounding the euro area growth outlook have become less pronounced, but remain tilted to the downside and relate predominantly to global factors.”

In the 9 March policy meeting, the ECB conceded some ground to the hawks by removing one phrase from its statement.  It removed the part that said, “The Governing Council will act by using all the instruments available within its mandate” (if warranted).”

“Draghi acknowledged this change in his press conference as a response to a reduction in downside risks, contributing to a rise in EUR following the 9 March policy meeting.”

“The current guidance on rates is still quite dovish (at present or lower levels for an extended period, well past the horizon of net asset purchases). However, it is somewhat contradictory to the removal from its statement that it will use all instruments in its mandate, suggesting lower rates are no longer on the table.”

“The introductory statement is not expected to change, but there is some risk that the ECB tweaks it again.  (Such as describing risks as more balanced, or removing the “or lower levels” from its rates policy guidance).”

“Draghi will presumably lean heavily on the lower core inflation reading in March as supporting the case for maintaining its dovish policy guidance.  The latest CPI inflation reading will be released the following day on Friday this week.”

“But he will also be called on by the media to respond to evidence of improvement in the European economy, the global economy and rebound in investor confidence following the French election.”

“The market is increasingly focused on the timing of a shift towards normalizing policy.  At the 9 March press conference, the market reacted to any slight wavering in the Draghi commitment to persisting with low rates beyond the QE program end.  He may attempt to deflect any questions by saying normalization of policy were not discussed at the meeting, but it will be difficult for Draghi to unequivocally commit to the current policy guidance.”

“In recent days, the Eurozone PMI data rose to a new high, and the German IFO business climate index rose to a new high in April since 2011.”