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EMU CommentECB more upbeat about growth but sees a slow inflation pick up

  1. No change in policy or guidance
  2. Significant upward revision to growth, but a slow pick up in inflation
  3. ECB still underestimates inflation
No change in policy or guidance
The ECB did not announce changes in monetary policy, including its forward guidance. That was widely expected after the ECB, at the previous meeting on October 26, announced a reduction in monthly asset purchases and the extension of the programme. Instead, focus turned to the updated ECB staff forecasts for GDP growth and HICP inflation. According to Draghi, the officials did not discuss the design or end to QE. Also, Draghi explained that the officials did not discuss cutting the QE-inflation link in their guidance, but admitted that guidance for rates will gain in importance.
Significant upward revision to growth but a slow pick up in inflation
As expected, the ECB delivered an upward adjustment to its growth forecast for 2017-19 (see table), especially 2018. Draghi described the recent performance as “a strong pace of economic growth” compared to the earlier assessment of “increasingly robust and broad-based economic expansion”, adding that it was a significant upward revision. This said, the first growth estimate for 2020 was lower than the one for 2019, indicating that a moderation will continue after 2018, although it is expected to be relatively benign. Regarding the inflation outlook, the ECB revised its 2018 forecast higher primarily due to higher oil and food prices. Draghi added that the ECB now sees inflation as ‘moderate’ in coming months versus its earlier assessment of a ‘temporary decline’ towards the turn of the year. More importantly, perhaps, was that the first estimate of inflation for 2020 was 1.7 percent, below that required for the ECB to hit its inflation aim. It suggests that the ECB signals limited need for tightening over its forecast horizon.
ECB still underestimates inflation
The result of the policy meeting was more or less in line with our expectations. Even though the ECB made a “significant” upward revision to its growth forecast, it managed to dampen concerns that the ECB would appear hawkish via fairly downbeat 2020 estimates, especially for inflation. We continue to believe that the ECB underestimates the potential for underlying inflation to pick up more significantly given the robust pace of growth and signs of increased constraints in the labour market. Draghi also explained that muted wage growth eases the ECB's concerns about inflation. Hence, we still expect the ECB to turn more hawkish during 2018 than its current course for monetary policy suggests.

Source: ECB


Rasmus Gudum-Sessingø

Senior Economist


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