ECB meeting – Taper tempering

As expected, the ECB did not announce any new policy measures at yesterday’s meeting. While generally speaking, yesterday’s meeting was one of those meetings which do not necessarily require a press conference, ECB president Draghi sent two main messages: the fragile start of a cyclical recovery does not justify any tapering speculations, and, the ECB will not pull the trigger on Greece.

The ECB’s macro-economic assessment remained cheerful and almost self-congratulating. The tone on the recovery has become somewhat more positive and risks to the outlook for growth were for the first time in a long while described as “more balanced”, though still at the downside. The ECB staff projections remained virtually unchanged compared with the March projections, forecasting GDP growth in the Eurozone to come in at 1.5% this year, 1.9% next year and 2.0% in 2017. The positive tone was only slightly offset by Draghi’s remarks that the recovery had lost some momentum in the second quarter, which explained why the ECB currently only expected the recovery to “broaden” but no longer to “strengthen”. Cruising along. Interestingly, the ECB takes lots of comfort from stronger domestic demand. In our view, continued deleveraging and still high unemployment make banking on domestic demand as a sustainable growth driver a risky strategy. As regards inflation, the slight uptick of oil prices has pushed up inflation projections for this year to 0.3%. For 2016 and 2017, inflation projections remained unchanged at 1.5% and 1.8% respectively.

The ECB’s current economic and inflation outlook could give rise to speculations about an earlier-than-expected end of QE. To tackle any of these speculations, Draghi emphasized several times yesterday that the ECB’s macro-economic outlook was conditional on the full implementation of QE. Moreover, there were three even stronger signals from Draghi that any tapering discussions were premature: 1) the cross-checking part of the introductory statement included a new sentence reading that “…confirms the need to maintain a steady monetary policy course, firmly implementing the Governing Council’s monetary policy decisions”; 2) Draghi said that even if the inflation projections were close to the ECB’s definition of price stability, the ECB was nowhere near fulfilling its target and could even add to the monthly purchases; and 3) any exit strategy was a “high class problem” and not yet discussed by the ECB. Even possible bubbles or misallocations in financial markets were no reason for the ECB to adjust QE. Draghi clearly stated that any possible negative effects from QE had to be tackled by supervisors but not by monetary policy.

However, despite trying to temper tapering speculations, Draghi is still struggling to give clear guidance. The question on whether QE could be ended before end-September 2016 if inflation expectations are back at where the ECB wants them before, was unanswered.

The story of the hour (or better: days, weeks, months and years), is clearly Greece. Earlier yesterday, some details of the latest – some even call it the last – take-it-or-leave-it offer from Greece’s Eurozone creditors had surfaced. According to media reports, the Eurozone would be willing to adjust Greece’s fiscal targets for the coming years. Instead of a permanent primary surplus target of 4.5% starting next year, Greece would be allowed a softer path, gradually tightening austerity screws from a surplus of 1% this year to 3.5% in 2018. However, it is unclear how the Eurozone creditors want to stick to the same debt targets without debt restructuring when fiscal targets are softened and growth has been weaker. Here, Draghi – who initially didn’t want to comment on Greece at all – said that the ECB wanted Greece to be in the Eurozone but that there was a need for “a strong agreement”. Greece was a viable economy if the right policies were implemented. The ECB was in favour of a strong agreement which provided social fairness and economic growth but also fiscal sustainability and financial stability. Answering to questions on ELA and possible additional haircuts on Greek bonds, Draghi remarked that the ECB would stick to its rules-based approach and the different rules applied to ELA and the ECB’s collateral rules. It is obvious that the ECB will not pull the trigger on Greece autonomously. As long as there is the political will from all sides to find a sustainable agreement, the ECB will continue with its current ELA and liquidity stance.

All in all, yesterday’s press conference showed that the ECB is aware of the upcoming tapering speculations and clearly wants to temper them. However, more forward guidance and communication streamlining will be needed in the months to keep speculations at bay.

Carsten Brzeski