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EMU CommentStronger confidence and minimum verbal intervention

  1. Stronger confidence in a rise in inflation
  2. Draghi made the minimum verbal intervention
  3. March meeting probably more interesting
Stronger confidence in inflation rise
Today’s ECB monetary policy decision text was an exact copy/paste of the December meeting, implying no change to policy or guidance. While that was in line with our expectation, some saw a slight possibility of the ECB opting to cancel the guidance for a possible increase in the asset purchase programme. That left all focus on the press conference. There, the ECB president made a slight upgrade of the description of strong economic momentum, which “strengthens further” the ECB’s confidence in rising inflation. It suggests that the ECB could raise forecasts again when due in March. Add to this that Draghi, in the Q&A, saw some signs of wage rises. Meanwhile, Draghi expects inflation to hover around the current rate in coming months. More interesting and widely expected, Draghi included some verbal intervention, as he believes that recent “exchange rate volatility” increases uncertainty. Finally, the prepared introductory text did not mention the “revisit” of communication as the minutes of the December meeting revealed will happen early in 2018, but he reminded us that the relative influence of policy pillars will change during the year.
Draghi did the minimum verbal intervention
Regarding the verbal intervention against the EUR, Draghi only made the minimum verbal intervention expected from him beforehand after a number of warnings from fellow Governing Council members. The impression was that he did not sound too concerned about the current level of the EUR. Recall that the same wording was introduced in September 2017 and then removed at the following policy meeting in October. He also argued that it is too early to assess the pass-through effects. Also, one could argue that the EUR has not strengthened that much since September and the recent surge in EUR/USD is mostly based on USD weakness. And basically, as long as EUR strengthening coexists with stronger fundamentals, one should probably not worry too much about risks to the expected rise in inflation. But Draghi did reveal concerns in the Governing Council about recent US policy talks, both with regard to exchange rates and overall international relations.
March meeting probably more interesting
The ECB will revisit its communication and we expect the March policy meeting to be much more interesting in this regard. The bank will also provide updated economic forecasts at the meeting, which now looks likely to be lifted. Furthermore, given that the economy performs as expected and there might be somewhat stronger inflation signals, the ECB might opt for going for a first guidance change, excluding the possibility of asset purchases to increase further. Although the signal change is modest (and hardly surprising), it is a move that we expect to be followed by further hawkish steps during the year. But Draghi was very clear that he “sees very few chances at all” for a rate hike this year. We expect a first hike in Q1 2019, but, of course, that requires further EUR strength not spoiling the outlook.

Source: Macrobond


Rasmus Gudum-Sessingø

Senior Economist


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