• Economy

7 days of Economics: ECB, Balancing act

Thibault Mercier
Thibault Mercier
  • The ECB has tweaked its forward guidance
  • GDP forecasts have been revised up 
  • Yet the central bank remained cautious on inflation

This week took place the ECB monetary policy meeting for June. As expected, members of the Governing Council decided to tweak the forward guidance, dropping the reference to potential lower policy rates in the future. They now expect “the key ECB interest rates to remain at their present levels for an extended period of time”. 

This change comes against the backdrop of an improving economic outlook. The ECB revised its GDP forecasts up for this year and next as well as 2019 to respectively 2%, 1.8% and 1.7%. Besides, the risk assessment has been upgraded too: risks that were tilted to the downside are now broadly balanced. This is the first time since August 2011. 

This optimism on the growth outlook should not be overplayed however and seen as a pre announcement of an imminent monetary tightening. Indeed, if the macroeconomic situation is undoubtedly improving, inflation pressures remain weak with core inflation still subdued

During the press conference M. Draghi repeatedly underlined the need to be patient, while at the same time insisting on factors that could delay the inflation adjustment such as the low quality of newly created jobs, the less optimistic picture depicted by broader measure of underemployment or structural changes that could weigh on wage growth (such a decentralization of wage talks). All in all, the ECB sounded slightly more dovish than expected, giving the impression that it is in no rush to end QE. We expect more details on the exit strategy to be communicated at the September meeting although yesterday press conference conveyed the feeling that this announcement could be delayed 

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