LONDON — The governing council of the European Central Bank (ECB) holds its March meeting on Thursday, and while fireworks are unlikely, the bank’s rate decision and the monthly press conference from President Mario Draghi will be keenly watched given recent improvements in conditions in the single currency area.
The ECB is all but certain to leave current monetary policy in place and maintain a promise for lengthy stimulus. The bank’s extended but lowered programme of bond buying is set to kick off next month.
Late in 2016, the central bank said it would undertake at least six months of extended QE purchases at a curtailed rate of €60 billion per month, down from the current €80 billion figure.
Writing on Wednesday evening, JP Morgan Asset Management strategist Vincent Juvyns noted that the improving data on the continent should help the ECB defend its shrunken QE programme.
Here’s Juvyns key passage (emphasis ours):
“Monetary policy should be unchanged. The ECB announced in December that it would reduce purchases to EUR 60bn per month starting in April and we expect them to acknowledge that the macroeconomic environment has indeed improved sufficiently to allow them to do that. Eurozone fourth quarter GDP growth has been confirmed at a robust (for Europe!) 0.4% quarter-over-quarter.
“Despite political uncertainties, confidence indicators remain strong, which bodes well for Q1 2017 growth. Headline inflation increased to 2% in February on the back of higher energy prices (oil prices have rebounded almost 75% since February last year) but core inflation remains stuck below 1%. In this context and taking into account looming political risks, the ECB has no reason to change its monetary policy now and will at best review its macroeconomic forecasts.”
So while rates and the extent of QE are unlikely to change, what could shift is the bank’s stance. For the last several years, President Draghi has struck a largely dovish tone in speeches and press conferences. With the eurozone now growing faster than both the UK and the USA and headline inflation hitting 2% last month, some expect hawkish hints to work their way into Draghi’s comments.
That’s not a view shared by analysts at Japanese bank Nomura, which sees Draghi looking through headline inflation and to the much lower core inflation to justify remaining dovish.
Writing last week, the team said: “We expect Mario Draghi to acknowledge that the downside risks to the economic outlook have ebbed in recent weeks, but partly thanks to the upcoming elections, he will probably stress that the overall balance of risks is still tilted to the downside.”
“We also expect him to argue that core inflation is still too low for the ECB’s comfort… ECB President Draghi has been quite clear that the ECB wants to see more evidence that its inflation goal will be achieved before it normalizes monetary policy.”