ECB: first (hawkish) move since 2011

The ECB took its first step towards a very slow normalisation of its monetary stance – a very small one, but symbolically important nonetheless.


As we expected, the ECB moved to a more neutral stance today by describing the risks to economic activity as “broadly balanced” and by removing its bias to even “lower” policy rates. The symbolic significance of the move should not be underestimated. It is the first time that the balance of risks to growth has been upgraded since August 2011, just before Mario Draghi became president. Barring an adverse shock, today’s ECB meeting will be remembered as the first step in a very gradual normalisation process.

The broader tone of the press conference was still dovish on the back of subdued core inflation in the euro area. Draghi said that “very little has changed” from that perspective. Eurosystem staff projections for HICP inflation were lowered despite stronger GDP growth, largely due to lower oil prices and a stronger EUR.

Importantly, the ECB did not discuss policy normalisation at this stage, nor did it task ECB committees to study its exit strategy. This, in our view, was the biggest dovish surprise and the clearest sign that the ECB remains committed to finishing the job. Ultimately, the decision to embark on policy normalisation will be driven by core inflation and wage growth, the latter being once again highlighted as a key input in the ECB’s decisions.

Our baseline scenario remains unchanged, including a slow tapering starting in Q1 2018 and a one-off deposit rate hike in June 2018, but risks are tilted towards a delay in the ECB’s exit. Specifically, we see a growing risk that a tapering announcement will be postponed to October, if not December 2017, in order for the ECB to secure a more convincing upward adjustment in core inflation.

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