Today’s ECB meeting should not be a reason for anyone to postpone vacation plans or to change preparations for the next round of World Cup matches in Brazil. Following the June fireworks, we expect the ECB to take it easy. It will probably take until the end of the year before the June measures show any significant impact on lending. We expect the calm after the storm to last for quite some time.
• Sentiment weakens. The latest confidence indicators for the Eurozone have weakened somewhat. The PMI and the EC sentiment indicator, the two most prominent confidence indicators for the Eurozone, weakened in June. The absolute levels of both indicators still point to solid economic growth.
• Inflation stabilises. As expected, headline inflation remained unchanged at 0.5% YoY in June. As negative base effects petered out, prices started to exert upward pressure on inflation. Services continue to be the biggest driver of inflation.
• More of the same. The latest monetary data provided further evidence that the fragile recovery remains creditless. In fact, loans to the private sector dropped in May. While the sharp drop in mortgage lending could be the result of a month packed with public holidays, the continued drop in loans to non-financial corporations provides another ex post justification for the ECB’s latest action in June. Even if the credit cycle lags the economic cycle, there are still hardly any signs of a credit-cycle turnaround.
• Flexible fiscal rules. In the absence of any substantial news, Mario Draghi has the chance to either keep the press conference very short or use the time for another call on governments to do their homework, in both structural and fiscal terms. The latest discussion on further reform of the Eurozone’s fiscal rules will not have amused the ECB. Even if European government leaders eventually agreed to use the existing flexibility of the rules and to not search for new ones, this latest episode should have reduced any ECB willingness to ever consider unconditional purchases of government bonds.
Read the full report: Economic Research