ECB: On hold but cautious regarding the economic outlook - ING

Carsten Brzeski, Chief Economist at ING, notes that the ECB stayed on hold at yesterday’s meeting and still sounded very cautious regarding the economic outlook for the Eurozone.

Key Quotes

“As expected, the ECB kept its current wait-andsee stance as caution and risks regarding the outlook for inflation and growth still outweigh any tender optimism.

As regards the macro-economic outlook, the ECB still sounds extremely cautious. The strong growth performance in the first quarter was taken as a nice windfall but definitely not for granted. According to ECB President Draghi, the recovery should continue on the back of domestic demand but also, and probably mainly, fueled by the ECB’s monetary policy measures. Slightly more optimism regarding the growth outlook could only be found in the phrase that “risks to the euro area growth outlook remain tilted to the downside, but the balance of risks has improved…”.

This still very cautious outlook was also reflected in the latest projections of the national central banks’ staff, which was revised upwards for 2016 to 1.6%, from 1.4%, remained unchanged for 2017 (at 1.7%) and even lowered for 2018 (to 1.7%, from 1.8%). As regards the ECB’s take on inflation, the ECB still refrains from explicitly putting risks labels on its inflation outlook. Instead, the ECB continues seeing inflation coming in below target going into 2018. While the staff projections for 2016 were revised upwards to 0.2%, from 0.1%, the inflation projections for 2017 and 2018 remained unchanged from the March projections (1.3% in 2017 and 1.6% in 2018).

Interestingly, the latest projections were explicitly conducted taking into account the already announced but also announced and not yet implemented monetary policy measures. This means that there currently is a high chance that the ECB will eventually have to top up its monetary measures, rather than starting early tapering. There are only two, currently rather unlikely, scenarios in which the ECB would start tapering at least after the official end of QE in Spring 2017: either the ECB breaks with its recent track record of both overestimating growth and inflation or the Eurozone recovery become all of sudden self-sustained.

In the absence of any substantial news on monetary policy, the ECB strengthened its language and message for Eurozone governments.

All in all, yesterday’s ECB meeting in Vienna could clearly not compete, at least not in terms of excitement, with Austria’s presidential election thriller. It was one of these in between meetings, at which ECB President Draghi played his cards close to the chest. With potential upcoming market tensions and excitement in the coming weeks, stemming from the next Fed meeting and the British referendum, the ECB played it safe and kept all options open.”