The European Central Bank (ECB) left monetary condition unchanged at its May meeting but the Governing Council (GC) is clearly concerned about the inflation outlook. While they didn’t do anything today, dovish comments from ECB President Mario Draghi suggested the central bank was just waiting on further information before acting next month. That new information will include updated staff forecasts, March quarter GDP data (scheduled for release on May 15) and of course there will be the next monthly readings on inflation
At the press conference today Draghi stated
the ECB is happy the recovery is firming up, but they are dissatisfied with the
projected path of inflation. That’s
consistent with our view that while the growth outlook is improving in the
Euro area it will prove to be insufficient to make any serious dent the
significant amount of spare capacity across the region which poses downside
risks to inflation. Indeed annual
inflation is currently negative in five member states.
So what could they do in June? While the ECB confirmed its unanimous
commitment to using unconventional instruments within its mandate, it’s too
early to expect quantitative easing.
It’s more likely we will see a cut to interest rates (a cut to the
refinancing rate and a negative deposit rate).
That would most likely reverse the recent drift higher in market
interest rates. However such a move
would be large symbolic as it would prove insufficient to cure what ails the
Euro area, although it might be sufficient put some downward pressure on the
Another likely move is for the ECB to stop sterilising their €172 billion holding of sovereign bonds purchased in the Securities
Markets Program (SMP) by stopping the reabsorption of the SMP cash. That would have a similar effect to QE
although it differs in the sense that the asset have already been purchased - in fact you could call it "delayed QE".
The next meeting of the Governing Council
is scheduled for June 5th.