ECB Removes Explicit Pledge to Buy More if Necessary

The euro had been pushed below yesterday’s lows prior to the ECB’s initial statement.  In it, the ECB removed the explicit pledge to buy more assets if needed.  The euro recovered to new session highs and took out yesterday’s high before reversing lower.  This is a minor tweak to the forward guidance.   With the broadest economic expansion since before the crisis and the risks of deflation successfully arrested, there is little chance conditions would quickly deteriorate that would require more aggressive easing.  

The tweak is simply good housekeeping.  It was not longer needed.  That said, if there is some kind of shock, there should be no doubt the ECB would respond regardless of its explicit guidance. 

Draghi and the ECB seem optimistic on growth.  The staff revised slightly higher growth this year to 2.4% from 2.3%, while keeping the 2019 and 2020 growth forecasts unchanged at 1.9% and 1.7% respectively.  Primarily survey data, but some other economic reports, like German factory orders, suggest there has been some loss of momentum at the start of the year.   

The ECB staff also made a minor tweak in its inflation forecasts.  This year’s forecast was not changed at 1.4%.  Next year’s headline CPI was lowered to 1.4% from 1.5%.  The inflation projection for 2020 was left unchanged at 1.7%.  Draghi repeated a couple of times that the underlying rate of price pressures are subdued, noting that “victory can’t be declared yet on inflation.”

At the end of the day, there is little fresh we learned today.  The asset purchases will continue through at least September.  Draghi and the  majority do not seem satisfied yet with the progress on inflation.  Further tapering in Q4 still appears to be the most likely scenario. 


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