Eurozone: ECB forcing a calm summer – ING

Carsten Brzeski, Chief Economist at ING explains that with the QE easing bias staying in place, no inflationary pressures and no changes in the official language, the ECB appears to be in no rush to taper and suggests that the first tapering discussion will be in September; at the earliest.

Key Quotes

“It seems as if the one and only goal of yesterday’s ECB meeting was to calm financial markets and recent tapering speculation, which some even labelled a light version of a taper tantrum. There were no changes to interest rates and even more important there were also no changes to the easing bias on QE or any other key phrases in the official communication. In fact, the introductory statement was almost a verbatim copy of the one from the last meeting in June.”

“In short, the ECB still sees improving momentum in the Eurozone recovery, but without inflationary pressures or wage increases. Risks to the economic outlook are still balanced and the outlook for inflation still has not received any risk assessment.”

“As regards the recent taper discussion, ECB President Mario Draghi tried to talk it down. In its official communication, the ECB sounded as dovish as possible by keeping one of the key sentences, on the QE easing bias, in place by repeating that “the Governing Council stands ready to increase the programme in terms of size and/or duration”. Draghi also reiterated his last four key words of “confidence”, “persistence”, “patience” and “prudence”. Even more important, Draghi said that the Governing Council had been unanimous in the decision not to change the forward guidance and also in the decision not to set a precise data in the future to discuss possible changes to the ECB’s monetary policy stance. However, Draghi said that the Governing Council will discuss the future of QE in the autumn.”

“It sounds exciting but is also obvious given that QE would expire in December if the ECB does not decide differently. In this context, it was interesting that the ECB did not re-use the phrase from the Sintra speech referring to an adjustment of the parameters of QE to keep a constant monetary stance when the economy continues to recover. In our view, this phrase could still be the best justification of any future tapering but apparently it is – yet – too complicated for some market participants.”

“Looking ahead, we feel comfortable with our current base case scenario that the ECB will task its working committees to investigate several options for tapering in September, before deciding on “lower for longer” starting in January 2018 at the October meeting before announcing the nitty-gritty details of tapering at the December meeting.”

“Nevertheless, yesterday’s press conference also showed how difficult the ECB’s life currently is. Fine-tuning its monetary policy in a world without inflation but with a cyclical recovery is not an easy one. Those were the days when the ECB did not have to talk about confidence, persistence, patience, prudence, not transitory, core inflation and wages as lynchpin. Back in the good old day, the ECB only had a single-needed compass.”

“With yesterday’s press conference, ECB President Draghi clearly wanted to put the Sintra dogs back on the leash. It was an attempt to force a calm summer in financial markets by stopping and even rewinding latest taper speculations. Tapering will come but the path towards the tapering announcement will be extremely gradual, as the ECB does not want to distort markets. Draghi tried to give the ECB, financial markets and ECB watchers some quiet summer weeks to reflect and digest.”