Four conditions from the ECB - Rabobank

Analysts at Rabobank exlained that as expected, the ECB president argued that the ECB will look through transitory developments in inflation and instead will focus in the “coming months” on judging “whether higher headline inflation translates into higher underlying inflation [...]”.

Key Quotes:

To that end, Draghi provided a bit more clarity on how it would judge this process:

The “medium term horizon is the relevant horizon.”; this tallies with our view that the 2019 staff projection for inflation is a key figure to watch in the future

Second, there has to be a durable improvement in inflation, so it “cannot be transient.”

Third, the inflation has to be of a “self-sustained” nature, meaning that inflationary pressure must remain even when monetary policy support will be removed. This tallies with our own

view that we should not only see an improvement in core inflation, but also an improvement in underlying wage developments (although the ECB president steered clear from making a strong call for higher wage growth as he warned that productivity growth matters as well.) 

Fourth, Mr. Draghi underscored that the inflation objective is defined for the Eurozone as a whole. The ECB won’t consider this condition to be fulfilled if inflation has met its target in a single member state or a group of member states rather than in the Eurozone as a whole. In response to a question, the ECB president also noted that he does not foresee “unmanageable” divergence of inflation rates in the euro area. Our interpretation here is that the ECB would thus accept the possibility of inflation overshooting in some member states (which of course is almost unavoidable if there is a certain distribution around the mean).

Altogether today’s press conference lived up to our expectations and we see no reason to change our view that, in the upcoming months, the ECB is likely to stand squarely behind the decisions taken last December."