As regards the macro-economic outlook, the ECB still sounds extremely cautious. The strong growth performance in the first quarter was taken as a nice windfall but definitely not for granted. According to ECB president Draghi, the recovery should continue on the back of domestic demand but also, and probably mainly, fueled by the ECB’s monetary policy measures. Slightly more optimism regarding the growth outlook could only be found in the phrase that “risks to the euro area growth outlook remain tilted to the downside, but the balance of risks has improved…”. This very cautious outlook was also reflected in the latest projections of the national central banks’ staff which were revised upwards for 2016 to 1.6%, from 1.4%, remained unchanged for 2017 (at 1.7%) and even lowered for 2018 (to 1.7%, from 1.8%). As regards the ECB’s take on inflation, the ECB still refrains from explicitly putting risks labels on its inflation outlook. Instead, the ECB continues seeing inflation coming in below target going into 2018. While the staff projections for 2016 were revised upwards to 0.2%, from 0.1%, the inflation projections for 2017 and 2018 remained unchanged from the March projections (1.3% in 2017 and 1.6% in 2018).
Interestingly, the latest projections were explicitly conditioned both on existing stimulus and also those measures that have been announced, but are yet to be implemented. This means that there currently is a high chance that the ECB will eventually have to top up its monetary measures, rather than starting tapering early. There are only two, currently rather unlikely, scenarios in which the ECB would start tapering, at least after the official end of QE in Spring 2017: either growth and inflation come in at or above, rather than below (as has been more common), the ECB’s forecasts, or the Eurozone recovery becomes suddenly self-sustained.
In the absence of any substantial news on monetary policy, the ECB strengthened its language and message for Eurozone governments. The traditional paragraph on structural reforms and fiscal policy was sharpened relative to earlier meetings. In particular, phrases like “structural reforms are necessary in all euro area countries”, the “enhancement of current investment initiatives” and “all countries should strive for a more growth-friendly composition of fiscal policies” were clear signals. Signals that could also be considered as yet another response from the ECB to recent criticism from Germany.
All in all, today’s ECB meeting in Vienna could clearly not compete, at least not in terms of excitement, with Austria’s presidential election thriller. It was one of these in-between meetings, at which ECB president Draghi kept his cards close to the chest. With an uncertain few weeks ahead, owing to the next Fed meeting and the British referendum, the ECB played it safe and kept all options open.
Chief Economist, Frankfurt