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Investors who snoozed through Thursday’s European Central Bank meeting would have missed just one subtle, but important, shift.
ECB President Christine Lagarde, in the introductory statement at her news conference following a meeting of the policy-setting Governing Council, highlighted a change in the inflation assessment.
Lagarde said the ECB noted measures of inflation “have remained generally muted, although there are further indications of a moderate increase in line with previous expectations.”
A “moderate increase” may sound bland, but it marked a shift from the December assessment of a “mild” increase. And it contrasts with the October assessment that found all measures of inflation “muted,” noted Carsten Brzeski, chief economist at ING Germany, in a note.
So that’s an ever-so-subtle shift in the ECB’s inflation assessment, but not one that signals any imminent change in policy, analysts said. Indeed, the ECB, as expected, left rates unchanged and made no alteration to its plan to keep rates low and maintain its renewed asset-buying program until stubbornly low inflation appears convincingly on track toward converging with the bank’s target of near but just below 2%.
Lagarde, meanwhile, maintained that risks to the economic growth outlook in the eurozone remained tilted to the downside, but said recent developments on the international-trade front — namely the phase-one U.S.-China trade deal — had made those risks somewhat “less pronounced.” She also offered a hopeful assessment of the potential for heading off a U.S.-European Union trade fight.
The ECB also announced the expected launch of its monetary-policy strategy review, which Lagarde said she hopes to see completed by year-end. The review will encompass the ECB’s definition of price stability and how it measures inflation, while also looking at how considerations such as financial stability and climate change could affect monetary policy and its goals.
So investors can watch and wait. If the macroeconomic backdrop, including the inflation outlook, “stays robust around the current level, we see a solid case for the ECB changing its growth risk assessment in H1 20 (potentially as early as the March meeting), together with the new staff projections,” wrote analysts Piet P.H. Christensen and Aila Mihr, at Danske Bank.
“However, while resilient core inflation, in combination with a strengthening cyclical rebound, could be enough to convince the ECB to drop the easing bias in H1 20, we doubt it will be enough to take the ECB back into tightening mode in the near future,” they said.
While ECB watchers took note, traders offered little reaction. Indeed, the euro, which was flat in the wake of the ECB decision and Lagarde’s remarks, subsequently lost ground as renewed worries around a viral outbreak took a toll on global equity markets and spurred demand for haven assets. The euro EURUSD, -0.4867% fell 0.5% versus the U.S. dollar to trade at $1.1038 in midday U.S. trade.
“All in all, ECB meetings seem to have returned to a normal level of boredom” in the wake of Lagarde taking the helm from Mario Draghi late last year, Brzeski said.
“Unless there’s a severe economic accident, the best we can expect from the upcoming ECB meetings this year could be a dropping of the easing bias and possibly hints at an end to QE,” he said, adding that judging from Lagarde’s comments, any substantial changes before the end of the strategy review look unlikely.
