Today’s European Central Bank (ECB) meeting was eagerly awaited by investors expecting hints on when they might look to further adjust monetary policy.
In October the ECB initiated a reduction in their monthly bond purchase program, which forms the basis of their quantitative easing (QE) policy. This was decreased to €30 billion per month and is planned to run until September 2018. What happens after that is the subject of intense speculation.
The monthly ECB meeting concentrates on the economic fundamentals of the euro-area economy in judging whether the current monetary policy settings are appropriate. Other non-economic factors will be discussed from time to time as will the balance of risks to economic growth and inflation. It also provides certain guidance in terms of how they see monetary policy (interest rates and QE) developing over the near future. It was this forward guidance that markets were focusing on. It has become increasingly important as the value of the euro has been climbing significantly over the last few weeks.
In a nutshell this meeting failed to deliver in terms of any new steer on how and when QE would end and when interest rates might start to rise. With the economic backdrop and associated risks basically unchanged the ECB left their guidance similarly so. In other words, the current level of bond purchases were set to remain at €30 billion per month “until the end of September 2018, or beyond if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” Moreover, “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 the asset purchase programme in terms of size and/or duration”. On interest rates “We continue to expect them to remain at their present levels for an extended period of time and well past the horizon of our net asset purchases”. This was unchanged from previous months.
Whilst clearly becoming incrementally more comfortable with the euro-area economy and the likelihood of inflation returning to target, the ECB is very sensitive to the fact that underlying inflation remains very low and is not yet convincingly on an upward trend. For this reason it still sees the need for continuing significant monetary accommodation.
There were a couple of noteworthy changes in other elements of the statement which did produce some reaction in markets. Firstly, economic growth was described as “robust” whereas previously it was called “strong” and, accelerating more than expected in the second half of 2017.
Perhaps more interesting was the reinstatement of a comment on the currency – last seen in September: “…the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.” Not concentrating on the level of the currency directly was taken to mean that the ECB is not yet overly concerned by the appreciation of the euro and indeed the currency traded to new three year highs against the US dollar. In a swipe at a US official who appeared to be talking the dollar lower yesterday, ECB President Draghi explained that the ECB does not target the level of the euro for “competitive purposes”.
Bond yields moved a little higher particularly in peripheral Europe as markets deduced that currency movements alone would not likely stop progress towards a tightening of monetary policy. In March, the ECB’s economists produce new forecasts and it will likely be at that meeting where things will become more interesting.