ECB meeting - more of the same

It was not exactly a surprise when the ECB today announced to keep its interest rates unchanged. And judging from the press conference, the ECB has not suddenly become wildly optimistic. The easing bias remains in place.
If anything, macro-economic developments since the last meeting have improved. Still, the ECB is far from becoming over cheerful. In fact, the ECB’s macro-economic assessment was only a taking-stock of latest developments but not a change in expectations. A particular green shoot according to Draghi was the fact that domestic demand was the main driver of the growth pick-up in the second quarter. In terms of wording, the former “stabilisation in economic activity” has become “a gradual recovery”. Interestingly, this change in wording was not really reflected in the last ECB staff projections. As regards growth, the ECB staff revised its projections upwards for this year to -0.4% (from -0.6%) and downwards for next year to 1.0% (from 1.1%). As regards inflation, ECB staff now expect 1.5% this year (from 1.4%) and 1.3% (unchanged) for next year.
Notably, Draghi remarked that he couldn’t share enthusiasm about the recovery. According to him, the shoots were “very very green”. Risks to the economic outlook were still on the downside. In fact, next to the traditional risks like “recent developments in global money and financial market conditions and related uncertainties” and the lack of structural reforms, a new downside risk was presented: higher commodity prices in the context of renewed geopolitical tensions. Moreover, Draghi seemed to be concerned about the recent reduction of excess liquidity and its potential impact on money market conditions. The ECB will remain “particularily attentive” on liquidity developments. In our view, a clear hint that new liquidity injections and an extension of the full allotment procedures beyond July 2014 are still valid policy options for the ECB.
With the still rather pessimistic economic outlook, new potential downside risks and concerns about money market developments, it did not come as a surprise that Draghi confirmed the ECB’s easing bias and the fact that “rates will remain at present or lower levels for an extended period of time”. Judging from his comments on possible discussions on a rate cut today, a rate cut seems to be off the table for the time being but it is not in the trash bin, yet.
As expected, there were many questions on the ECB’s formulation of forward guidance. Up to now, the ECB’s forward guidance has differed from other central banks by not linking it to an economic variable. Listening to Drgahi today, we have the feeling that this will not change in the near future. The ECB is still very reluctant to go all the way. Instead, Draghi gave other clear hints at what market participants should look in the coming months. Remarks like “our mandate is to maintain price stability” or “we look at headline inflation not other definitions of inflation” sent a clear message that interest rates will not move as long as headline inflation forecasts remain comfortably below 2%. The inflation forecast of 1.3% for 2014 is currently probably the strongest argument in favour of unchanged rates. However, eventually the ECB could still be pushed into a situation in which it has to follow its other central bank peers. Just think of a possible oil price shock.
All in all, today’s ECB meeting just confirmed what we already knew. Rates will remain low for a long while but “forward guidance – the ECB-style” remains a shaky concept. If the ECB ever decide to release minutes, the minutes of today’s meeting will definitely not be in great demand.