The ECB hasn’t changed its mind on its monetary policy

Philippe Waechter, Natixis AM - Jueves, 20 de Julio

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The ECB remains committed for an extended period to a very accommodative monetary policy stance. There is no strategic change in the ECB economic diagnosis on the Euro Area. The recovery is getting strength and risks are now balanced. But the inflation rate is still way below the ECB target at below but close to 2%. On this specific point the ECB explains that the low oil price is an explanation but it is not sufficient as the core inflation rate is still close to 1%. Draghi said the inflation should stay close to the current level (1.3%) in coming months. Therefore no convergence to the target is expected by the European Central Bank in a foreseeable future. 

In other words, the recovery is strong for the real economy side but still very limited on the nominal side. As far as the inflation rate remains low, the monetary policy will remain accommodative; the ECB will continue to purchase large amount of assets as long as long term inflation expectations do not converge to the target. It could change its mind also in case of inflation surge in coming months but that's not the ECB perception of its profile.

I do not perceive in the ECB statement a change in tone or in the way the monetary policy will change in the future. Those who thought that there was a new message at the ECB seminar in Sintra were wrong. 

The asset purchases program will be discussed next autumn (probably in September) as the current one is supposed to end in next December if long term inflation expectations converge to 2% or if the inflation rate is close to the target. The amount which is currently at Eur 60bn per month will probably be lowered in 2018 as the recovery is strong but we won't have a termination date as long as the inflation rate at 2% is not expected rapidly. We can expect 30 or 40 bn per month after December 2017. 

The ECB has not to hurry in changing its monetary policy stance as its impact is asymmetric. Changing it too quickly is taking a negative risk on the recovery – that's not what is wished by the ECB for the Euro area economy. The central bank can wait for a higher inflation rate before changing its mind. 

The ECB target must be a stronger and more autonomous growth momentum supported by the domestic private demand. For that, an accommodative monetary policy for an extended period is still the recipe.

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