ECB Sticks to Knitting, No Surprise

The ECB met the minimum of market expectations by making a minor change its forward guidance.  The reference to policy rates being potentially lowered was dropped.  This  has long been priced in and the recognition by the ECB is but a baby step.   The ECB shows no sign of an early rate hike that previously was the subject of speculation.  There will be no tapering this year and the asset purchases will continue until a sustained rise of price pressures.  

Growth prospects have improved and the ECB says the risk assessment on growth is balanced.  However, underlying inflation remains unsatisfactory.  The risks emanate, Draghi says, primarily from abroad, perhaps referring to Brexit and the new US Administration.  

The leaks yesterday purported to be the staff forecasts were spot on--growth forecasts were tweaked by 0.1% from March for this year and the next two.  The staff's inflation forecasts were trimmed by 0.2% this year to 1.5% and 0.3% next year to 1.3%.  The CPI in 2019 is expected to be 1.6%, 0.1% less than it forecast in March and 0.1% above this year's projection.  

Draghi repeated his calls for structural reforms and for countries with fiscal  scope for stimulus (e.g. German) should use it.   The ECB President revealed that there was not a vote on the language change, but that there were no dissenting voices.  Although Draghi said there was no discussion of when it will announce the future of its asset purchases beyond December.  Many in the market expect it to be announced in September.   

The inflation signal is little changed and this is the key to ECB policy.  Draghi argued that low core inflation is mostly due to subdued wages, which he attributes to many factors, including, but especially structural changes.    Still, Draghi tried to balance this was a positive note.  The tail risks of inflation have been removed.  The output gap is closing.  Labor market slack is being absorbed. 

The euro briefly was pushed below $1.12 for the first time this month, but quickly snapped back.    The idea that the euro is being driven by unhedged buying of European equities does not appear disrupted by today's ECB meeting.  The idea that the dollar liquidity improved when as the US  Treasury sought to maneuver around the debt ceiling, that has been felt in the cross currency swap market, also will be unaffected by the modest changes of ECB's forward guidance.   A break of $1.1180, which corresponds to the 20-day moving average which the euro has not closed below since April 17, would be important.  

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