Central Bank Views

ECB More Confident on Growth, but Inflation Remains an Overhang

Typography

ECB left the monetary policy and the QE program unchanged in April. That is, the main refi rate, marginal lending rate and the depo rate stayed unchanged at 0%, 0.25% and -0.40%, respectively. Meanwhile, the asset purchase program would be continued at the pace of 60B euro per month from this month, through to the end of December 2017, or beyond, if necessary.

Policymakers acknowledged the increasingly solid economic recovery in the Eurozone. The key message about the economy was that the recovery in the bloc is strengthening and broadening, whilst risks are diminishing. Yet, they refrained from discussing about potential tapering, likely due to concerns over subdued core inflation. The single currency initially rose following comments about the economic recovery. Gains were, however, pared as inflation has remained an overhang.

Euro area recovery becoming increasingly solid

On the global and domestic economic outlook, policymakers suggested that "the signs of a stronger global recovery and increasing global trade suggest that foreign demand should increasingly add to the overall resilience of the economic expansion of the euro area". They also acknowledged that "incoming data since March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid, and that downside risks have further diminished". However, inflation has remained weak. The statement suggested that "measures of underlying inflation remain low and are expected to rise only gradually over the medium term, supported by our monetary policy measures, the expected continuing economic recovery and the corresponding gradual absorption of slack"

Substantial monetary accomodation still needed

Policymakers believed that the ultra accommodative stimulus measures should continue as the prolonged weakness on underlying inflation is worrisome. The ECB reiterated that "a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium-term". As President Mario Draghi indicated at the press conference, "in terms of my criteria the (inflation) assessment hasn't really changed". The statement also reaffirmed that key ECB interest rates would "remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases"

Draghi: We discuss policies, not politics

Regarding euro's strength after Sunday's French election, Draghi noted that "In the Governing Council meetings we discuss policies, not politics" and "we don't do monetary policy based on likely election outcomes". Yet, he admittedly suggested that the central bank does "internalise the information that comes from the effects that political uncertainty may affect our medium-term outlook". As far as we understand, Draghi personally prefers Emmanuel Macron to Marine Le Pen.