Thursday, May 8, 2014
Verbal acrobatics and a cliffhanger from Brussels
As expected the ECB kept its powder dry at today’s meeting. However, what started off as a rather dull meeting developed into a very exciting press conference. At some point in time, Draghi’s comments looked almost as acrobatic as many performances at Tuesday’s semi-final of the Eurovision song festival. However, in the end, Draghi had prepared everyone for new ECB action at the June meeting. The start of today’s ECB press conference was rather dull. The introductory statement was almost a verbatim copy of the one from the April meeting. According to the ECB, the gradual and weak recovery will continue, while at the same time inflation will remain low for a prolonged period of time. Interestingly, the ECB has put somewhat more emphasis on possible downward risks to the recovery. For the first time, the ECB mentioned private loan developments already in the part on the economic analysis and not only in the monetary analysis part. In addition, Draghi’s comments during the press conference on geopolitical risks also showed that the ECB has become somewhat more cautious. As regards the exchange rate, Draghi’s comments made listeners almost dizzy. Initially, Draghi defended the ECB against all external advice and criticism. He also said that the exchange rate was not a policy target. Later on, however, the exchange rate was called a “serious concern” for the ECB, which could not only have a negative impact on inflation but also on the recovery. Again the recovery. Looking ahead, Draghi gave the final goodbye to his predecessor’s famous “we-never-precommit”. The ECB’s forward guidance, which started last summer, had already been a first emancipation from the no-precommitment. Today’s statement that the Governing Council was dissatisfied with the current inflation path, was not accepting it as a fact of nature and was therefore comfortable with acting next month. Boom. This very last comment was supported by Draghi’s comment that “further information and analysis concerning the outlook for inflation and the availability of bank loans to the private sector will be available in June”. Moreover, Draghi stressed the next staff projections as an essential new piece of information in June. Of course, every next meeting will have new and more information than the previous one. However, with today’s press conference it will be hard for the ECB to take some “manana-manana” attitude. To the contrary, with his comments on the exchange rate and hints at possible June action, Draghi has pushed the ECB into a corner from which it will be very hard to escape. Nevertheless, in our view, it is not a given that the ECB will really act in June. In fact, on the back of better-than-expected Q1 GDP data, growth might even be revised upwards for this year. And what if the inflation forecast for 2015 and 2016 remains unchanged? And what if credit growth has improved slightly? It is exactly these uncertainties which kept the ECB from already acting today and might prevent it from acting in June. All in all, taking a step back and just looking at the facts, not a lot has changed with today’s ECB meeting. In our view, the real new thing is that the ECB has become more concerned about the strength of the recovery and has clearly put more emphasis on the exchange rate. . For the rest, any next steps remain conditional on the June staff projections. Admittedly, with today’s comments, Draghi has clearly presented a cliff hanger which makes it hard for the ECB not to come up with a brandnew episode of monetary action at the June meeting.