ECB meeting - Lip service for German hawks?

At today’s meeting, the ECB left interest rates unchanged. According to ECB president Draghi rate changes were not even discussed. While there was not much news from the ECB on the sovereign debt crisis and Greek PSI, the ECB’s brought back some gentle anti-inflation rhetorics.

It looks as if the ECB has lost this fearing feeling. The macro-economic assessment changed quite significantly compared with the February meeting. The very cautious language has been replaced by a moderately cautious language. Words like “tentative” and “high uncertainty” disappeared from the ECB’s introductory statement. The recent improvement of confidence indicators seems to have comforted the ECB, while at the same time still stressing downside risks. The recovery should at best be moderate. In more detail, the ECB has registered a stabilisation of economic activity, “albeit at a low level”. Despite this cautious optimism, the latest ECB staff projections for GDP growth were revised downwards. ECB staff now expects GDP growth of -0.1% this year (from +0.3% in December) and 1.1% in 2013 (from 1.3%).

The biggest change in the ECB’s macro assessment, however, was on inflation. In fact, inflation has returned as a prominent risk factor. The ECB does not any longer expect inflation to drop below 2% this year. This new assessment is also reflected in the ECB staff projections which show an upward revision of the inflation forecast to 2.4% for this year (from 2.0% in December) and 1.6% next year (from 1.5%). Risks to price stability are still balanced and the ECB expects “price developments to remain in line with price stability over the policy relevant horizon”. However, the phrase “with upside risks prevailing” indicates that inflation has not left the ECB’s one-needled compass.

There were more signs that the inflation alarm bells are gently sounding again in Frankfurt. The previous phrase which came closest to a code word for an easing bias “a very thorough analysis of all incoming data and developments over the period ahead is warranted” disappeared from the ECB’s introductory statement. Moreover, hawkish statements like “we are firmly committed to maintaining price stability” and “firm anchoring of inflation expectations…is of the essence” were added into the official communication.

Ahead of today’s meeting there was a lot of fuzz about a potential controversy between the Bundesbank president Weidmann and ECB president Draghi. In a leaked letter, Weidmann wrote about imbalances in the Eurozone's payment system, TARGET2, and the resulting risks for the Bundesbank, which would be exposed in the unlikely event of the Eurozone breaking up. During the press conference, ECB Draghi downplayed this discussion. He even proved to be a good charmer, explicitly praising the Bundesbank saying that “I cherish the culture and tradition of the Bundesbank of preserving price stability” and laudatorily referring to former Bundesbank president Tietmeyer. Bundesbank praise and anti-inflation rhetorics. Shamed be who thinks evil of it.

The new anti-inflation rhetorics are probably rather a lip service to soothe the Bundesbank, than a serious intention to hike rates anytime soon. However, after today’s ECB meeting at least further rate cuts seem to be off the table. With the stabilisation of the economy and inflation above 2% for longer-than-expected, another use of the LTRO bazooka to avoid a credit crunch looks currently more likely than a rate cut.