Observers of the European Central Bank may be divided on whether or not the ECB is done with monetary easing, but there is little doubt that Eurozone inflation data from May and June will be critical in deciding what happens next at the Eurotower.
Despite the ECB leaving interest rates unchanged Thursday, analysts generally agree that ECB President Mario Draghi’s press conference marked another dovish turn after his March performance. He acknowledged the Council was divided over whether the surprise March HICP print of 0.5% y/y marked a divergence from the ECB’s medium-term inflation outlook and said more information would be needed here before deciding whether inflation was hit by temporary factors or has really taken another turn for the worse.
With April HICP widely to see a rebound, a number of analysts point to June as the next key Governing Council meeting, when the ECB will have both April-May inflation data and a new set of staff projections on hand before its monthly meeting.
While markets took in Draghi’s comments that the Council was “unanimous” in its commitment to unconventional measures including QE, most analysts still see this as unlikely in the near term absent another dip in inflation, and many point to his remark that the ECB is not done with conventional easing as suggesting a final refi rate cut – possibly coupled with negative deposit rate – could well be the next tool out of the box.
The following are excerpts of analysts’ reactions collected by MNI:
NICK MATTHEWS, Nomura: “I went into the meeting expecting the ECB to be dovish but on hold so I think from that perspective was not surprised at the tone of the conference. There was a deliberate elevation of the threat level in order to effectively keep the easing bias alive and very much in play … It does elevate the importance of the next couple of meetings and in particular I think the extent of the inflation bounce-back that is expected in April. For all of the discussion about a commitment to use unconventional instruments Draghi was very clear that the ECB hadn’t finished with the conventional measures.”
CARSTEN BRZESKI, ING: “In the absence of any real action, the ECB provided markets with the expected verbal action. There are clearly two key takeaways from this sharpened language: i) the ECB is on even higher alert than before; and ii) unconventional measures, including the for markets so important QE, are backed by all ECB members.
“Listening to Draghi during the press conference and looking at the available options, however, still leaves us with the impression that QE will not happen any time soon…Draghi’s comment that the ECB had not yet reached the end of its conventional measures indicates that a refi rate without a negative deposit rate cannot be excluded.”
HOWARD ARCHER, IHS Global Insight: “It is hard to imagine how the rhetoric could get any more dovish without the ECB acting…The likelihood of further ECB action certainly appears to have increased appreciably following the bank’s latest comments. Indeed, the ECB would risk losing serious credibility if it did not react to any further fall in Eurozone inflation, marked appreciation in the euro or stalling in the Eurozone’s economic recovery.
“However, if 0.5% does indeed turn out to be the floor in Eurozone consumer price inflation and the Eurozone manages to keep on recovering gradually, the ECB may get away without having to take any further action. It is very possible that the ECB could end up trimming its refinancing rate from 0.25% to 0.15% or even 0.10%. We believe that the ECB would prefer not to go down the negative deposit interest rate route and will only do so if inflation falls appreciably further.”
JOERG KRAEMER: “Ultimately, the bank confined itself to verbal intervention today because it is rightly assuming that the March figure was distorted by one-off factors such as the timing of the Easter holidays. We expect inflation to rise this month to 0.8% (see chart), and for the medium term too the lowest point should now be behind us.
“[The ECB] also seems willing to buy up government bonds across a broad spectrum (QE)…Draghi made it clear today that it would not take deflation to trigger such a move, but that inflation would only have to be low (but still positive) for too long a period.”
RICHARD BARWELL, RBS: “The key takeaway from the meeting is that the Council did not act in response to weak inflation and despite all the positive tone in the Introductory Statement and the press conference, it is not clear that the Council will act in the future given that inflation is expected to bounce higher and the recovery continues to gain momentum.
“The Council may well do nothing more if the baseline scenario proves accurate but that does not mean that the Council will hike anytime soon either. We expect the Council to go into hibernation mode, with the reference to the large output gap taking centre stage in the communication strategy as time passes.”
HOLGER SANDTE, Nordea: “The ECB’s easing bias is still there and has not become smaller. A trigger for action could be inflation rates not rising at least a bit and/or a too strong EUR. Our base case still is that the ECB is done easing and that major unconditional measures will not be taken, barring a major shock to the economy. However, should inflation, contrary to the ECB’s and our own expectations, not pick in up April/May, the ECB might not resist the pressure to do something on the rate and/or unconventional side.”
CHRISTOPHER DEMBIK, Saxo Banque: “It is very likely that nothing will be decided [by the ECB] in the short-term. If we look closely at inflation last month, the slowdown is largely the result of a decline in energy prices (-2.1% in March). The scenario of deflation in the euro area is far from reality. It is more a process of disinflation that does not call for any exceptional measures at the moment.”
CHRISTIAN REICHERTER, DZ Bank: “The inflation picture painted by ECB head Draghi marks a rejection by the currency guardians of the QE speculations in financial markets. Even if the central bank managers consistently emphasize that asset purchases are a possible monetary instrument in principle, the ECB is unlikely to take this step in the foreseeable future.
“Overall the ECB is currently focused on a steady-hand policy and will continuing to rely on this as long as the overall economic outlook does not turn to the downside again.”
FREDERIK DUCROZET, Credit Agricole: “With inflation expected to rebound in April-May, the ECB is likely to remain on hold unless PMIs collapse or the EUR appreciates considerably further. By June, however, a number of factors could tip the balance, including the staff forecasts, which should be revised down again. On balance, we continue to see room for a small rate cut in June…Whether or not the ECB cuts its deposit rate into negative territory still depends on EUR strength.
“More importantly, the case for asset purchases seems to be building, with Draghi alluding to private debt rather than sovereign bonds, in line with our analysis. The ECB seems to be intellectually ready to react to the risk of a ‘lowflation’ with radical, non-conventional action.”
PHILIP SHAW, Investec: “Overall our impression is that the ECB is not in a hurry to deploy further easing measures. We remain of the view that it would prefer not to cut either the refi rate again, nor to take the deposit rate into negative territory … We suspect that it will probably deploy one or two more unconventional instruments in due course, perhaps designed around a programme to encourage credit flows to the corporate sector.
“We also remain sceptical of the potential of starting QE, not least because of the objections within Germany which would be raised…In a climate where prolonged low inflation or even deflation becomes a serious risk, discussions alone of QE may be of value in in stabilising inflation expectations and anchoring them close to the ECB’s target.”
THOMAS KOEBEL, SAB: “The ECB surprised with stressing its resolution to use all instruments within its mandate to fight any risks of a too prolonged period of low inflation…The Governing Council will act swiftly if required. On the other hand, ECB President Draghi talked about the need for more data to decide whether or not there is more need for action. He talked about months. So no action is expected in the May meeting.
“We expect the ECB to keep policy rates on hold in May. New Eurosystem staff projections in June will be the next guideline for the Governing Council. If they indicate any need for additional action, we think the ECB will introduce new unconventional measures.”