The outcome of the 10 June meeting of the ECB’s Council was no change in the stance (the pace of asset purchases) for the moment; no comment on the overall strategy, or more precisely, no acknowledgement that the pandemic QE programme will be scaled back next year; and still no realistic prospect that core inflation will get back to 2% anytime soon. Europe remains stuck in the low-flation rut.
The latest meeting of the European Central Bank’s Governing Council confirmed its very accommodative monetary policy, leaving its short-term stance of unchanged: bond purchases will continue at a ‘significantly higher pace’ for the next three months relative to what was delivered in the first quarter of the year.
The Council argues that financial conditions have “remained broadly stable,” but still worries about the possibility of a ‘premature’ tightening in conditions that “would pose a risk to the ongoing economic recovery and the outlook for inflation” – hence the decision to maintain the pace of asset purchases under the ECB’s quantitative easing (QE) programme.
While there was unanimity within the Council on the final statement, President Lagarde acknowledged there were differences on certain points. The hawks on the Council are unlikely to be quite so accommodating at the September and December monetary policy meetings.
The ECB had good news to report: “The latest data signal a bounce-back in services activity and ongoing dynamism in manufacturing production” and “indicators of consumer confidence are strengthening, suggesting a strong rebound in private consumption”.
The ECB also published its latest forecasts (see exhibit 1): The trajectory of GDP growth has been revised up significantly, largely reflecting a more positive assessment of growth in the third quarter.
The Council has revised its view of the risks around the growth outlook to ‘broadly balanced’. Last time around, the risks were tilted to the downside, but ‘more balanced’. These changes in code words are intended to be significant.
The forecast for headline inflation in 2023 is unchanged on last time, so it is interesting that the Council chose to emphasise the fact that the forecast for core inflation has been revised up to 1.3% in 2022 (from 1.1% before) and to 1.4% in 2023 (from 1.3% before).
The fact that core inflation in 2023 has been revised up by only 10bp given a more than 1% revision to the path of GDP speaks to the limited sensitivity of inflation to slack in the ECB’s forecast methodology.
Core inflation is still falling far short of the ECB’s target. We should not forget that the ECB’s forecasts for core inflation have shown a consistent pattern over recent years: they have been far too optimistic on the pace of reflation.
The Council resisted calls from some quarters to start reining in its monetary stimulus as the eurozone economy recovers and seemingly chose not to debate monetary strategy at this meeting.
President Lagarde stuck to her line that it was ‘too early’ to talk about tapering asset purchases under the pandemic purchase programme (PEPP) and what that would imply for purchases under the pre-pandemic QE programme (APP).
It is likely that the Council knows that it will wind down the PEPP next year and that it will have to scale up the APP somewhat to compensate, but that it just prefers not to say so to avoid a bond market tantrum.
Clarity on the plan is likely to coincide with clarity on the conclusions of the central bank’s strategy review.
It is unlikely the ECB will ‘follow the Fed’ and adopt average inflation targeting in the review. It is more probable that it will adopt a commitment to achieve a symmetric inflation target in a (nebulous) medium term that will be sugarcoated with guidance that the ECB will keep the monetary stance loose and could tolerate an inflation overshoot in the exit from the pandemic.
Warm words about tolerating overshoots in the far future should be judged in the context of a central bank that has been consistently overoptimistic on reflation, that currently expects inflation to fall far short of its target and that does not seem inclined to do much to rectify the situation.
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