Wednesday, April 15, 2015
ECB meeting - Unexpected excitment in Frankfurt
What everyone had expected to be a rather dull press conference will go down in history as an unforgettable meeting. Not so much due to new monetary policy action or insights but due to a female protester storming on top of ECB president Draghi’s desk, spraying confetti on him and shouting about the end of “ECB dictatorship”. Luckily, no one was harmed and the woman was quickly hauled away. A stalwart Draghi continued with the press conference just a few minutes later. The rest of the press conference could hardly match the excitement of the first minutes. As expected, the ECB kept interest rates unchanged. While the ECB’s macro assessment was somewhat more positive than at the ECB’s March meeting, not a lot has changed. Draghi’s main goal today was obviously to downplay any premature tapering speculations. And, he accomplished his mission. At least for now. As regards the ECB’s macro-economic assessment, Draghi stressed the prospects for a Eurozone recovery on the back of improved domestic demand, lower oil prices, the weaker euro and also structural reforms. Draghi also pointed to still existing risks to the recovery but the most notable change in the assessment was a slight change to the risk assessment. According to the ECB, risks to the outlook are still to the downside but now “more balanced” than in March. As regards inflation, the ECB kept the same assessment as in March, which is a very gradual increase in headline inflation over the next two years. More specifically on QE, Draghi repeated that monetary policy alone could not carry the economic recovery. Governments needed to continue with structural reforms. Addressing earlier criticism, Draghi said that QE did not prevent governments from implementing reforms but was rather conducive for reforms. Asked about possible side-effects from QE, Draghi acknowledged that a protracted period of low interest rates could lead to imbalances but he did not yet see any bubbles in the Eurozone. With many government bond yields currently trading in negative territory, we indeed are curious to learn more about Draghi’s definition of bubbles. In the days leading to today’s meeting, some market participants had started to discuss the possibility of an early tapering, an end of QE earlier than the officially intended deadline of September 2016. One reason for this discussion is actually the success of QE which has pushed down the euro exchange rate. At its current level, the weak euro would mechanically add another 0.4%-points to inflation, bringing headline inflation above 2% in 2017. This could already happen at the June meeting, when the ECB will present the next staff projections. During the press conference, Draghi tried everything he could to temper the taper discussion. According to Draghi, the tapering discussion was premature. And we totally agree with him. Draghi did not get tired of repeating that the full implementation of QE was required to “provide the necessary support to the euro area recovery”. Moreover, a new sentence in the ECB’s introductory statement clearly tried to temper tapering phantasies: “When carrying out its assessment, the Governing Council will follow its monetary policy strategy and concentrate on trends in inflation, looking through unexpected outcomes in measured inflation in either direction if judged to be transient and to have no implication for the medium-term outlook for price stability” In our view, this sentence is just ECB language for saying that the ECB can do whatever it wants and use whatever indicator it wants to use to determine the end of QE. All in all, ECB president Draghi clearly tried to temper any taper discussion. Whether he will succeed, is uncertain. If the recovery really unfolds and inflation forecasts start to pick up, Draghi will not only have to temper taper speculations in the market but, even more challenging, within the ECB itself.