ECB in wait-and-see mode – ING

Peter Vanden Houte, Chief Economist at ING, suggests that the minutes of the ECB’s monetary policy meeting in April contain little news.

Key Quotes

“The ECB seems to be convinced that the implementation of the new measures it announced in March will be sufficient to bring inflation back to its medium-term objective.

It seems as if after plenty of decisions had been taken during the March meeting, the members of the Governing Council had little left to discuss in April, apart from some modalities regarding the implementation of the new measures.

In the light of a subdued recovery with inflation remaining too low the members of the Governing Council insisted that the monetary policy decisions were working and that further monetary stimulus was still in the pipeline, as implementation of the latest measures had not yet begun. It seems as if the ECB wants to convey that it is not powerless. There was a general agreement that counterfactual scenarios should be emphasized to prove that the Eurozone economy would have fared worse without the ECB’s monetary policy measures.

On top of that the Governing Council made it clear that the “medium term” has never been specified, meaning that the ECB’s below but close to 2% inflation objective should not necessarily be reached within the horizon of the staff projections. In other words, the ECB doesn’t feel forced to act if the staff inflation forecasts would remain significantly below 2% over the forecast horizon.

At the same time the ECB knows that longer term potential growth is not determined by monetary policy. The Governing Council discussed at length how it could best bring the message that more structural reform is needed in that regard.

Regarding the Corporate Sector Purchase Program it is now clear that the Governing Council has no specific target in terms of the size of purchases. The success of the program will depend on the way it succeeds to support credit to the real economy. In other words, the compression of credit spreads matters more to the ECB than the amount of bonds purchased.

Finally, there was broad agreement to reaffirm the forward guidance, stating that asset purchases would continue at least until March 2017, while interest rates would remain low or even lower well past the horizon of the net asset purchases.

The minutes reaffirm our belief that the ECB is basically done. The bank goes at pains to convince the markets that it has done everything that is needed to fulfill its mandate. That said, while we think that interest rates have reached their trough, we don’t expect an abrupt end to the Asset Purchase Program in March 2017, but a gradual tapering until the end of 2017.”