European Central Bank President Mario Draghi said today in light of heightened global pressures and the sharp drop in energy prices since its last meeting in December, the ECB “may” need to review and “possibly reconsider” its monetary policy stance at the next Governing Council meeting on March 10.
*** The Governing Council will not have its formal quarterly Eurosystem Staff Macroeconomic Projections in hand until that March meeting, but we are certain Draghi would not have gone so far as to have explicitly flagged the next meeting as a “review” if the ECB staff did not already have enough data in hand on the magnitude of downward revisions yet again to its forecasts to fully justify a decision to ease again. And specifically, Draghi flagged inflation that was supposed to have stabilized and recovered in the first half of 2016 that is now not expected to rise until the second half of the year. ***
*** Even more importantly, Draghi would not have gone with such a strong message if he did not already have a strong majority consensus within the Governing Council for another round of easing in March. Of course they will not pre-commit, etc. etc., and so on. ***
*** We believe the ECB will both drop its deposit rate by another 10 basis points and step up the pace of asset purchases from the current 60 billion Euros per month at the March meeting, which were the additional measures discussed but left on the table at the December meeting. We expect it will do so for the simple reason the last thing the Governing Council will want after the communications disaster of the December meeting is to be accused yet again of not only under-delivering by the markets, but proven wrong – yet again – on taking adequate measures according to its own forecasts by developments down the road. ***
The Measures on the Table
It may be embarrassing to take an abrupt decision to ease again so soon after the highly defensive message sent in December that the measures taken at the time were, although disappointing to markets, absolutely adequate according to the ECB’s own assessment to meet what it considered a simple need to “re-calibrate” (i.e. tweak) its policy stance. But blame it on global developments.
While the ECB went out of its way to make clear the rather modest measures taken at the time were the same measures as formally tabled for consideration by the Executive Board – meaning Draghi was not stymied or even “overruled” by the Council hawks in taking more aggressive action – as we noted the reality was far more nuanced than that (see SGH 12/3/15, “ECB: A Bruised Consensus and Decision”).
And there were indeed various members of the ECB who had pushed for both deeper cuts in the deposit rate and a step up in asset purchases in December, as was subsequently revealed in the public release of the minutes.
The ECB denied and will continue to deny that there were any major divisions on policy measures to be taken, but that is because frankly the Board had already watered down its policy proposal before putting it up for discussion in light of what it already knew was going to be resistance from its hawks.
Draghi and his fellow ECB Council members can now point to new international risks that have changed its assessment despite a domestic Eurozone economy that is finally responding and the ECB having taken all the right measures – perhaps justifiably. And we suspect there will be no finger pointing at the hawks given the strong imperative to show a unified front and message.
Regardless, it is certainly far better to do the right thing, even if late, than not.