ECB: Breadcrumbs for the hawks - ING

Carsten Brzeski, Chief Economist, Germany, Austria at ING, holds the view that although the ECB dropped its easing bias on QE but subdued inflationary pressure leaves the extension of QE beyond September. 

Key quotes:

Inflation: More wish than reality
“As regards inflation, the ECB’s words still look much more promising than the actual numbers. According to Draghi, headline inflation will hover around 1.5% for the remainder of the year and underlying inflation remains low. This rather benign take on inflation is also reflected in the ECB’s staff projections. According to the projections, headline inflation is expected to come in at 1.4% in 2018 and 2019 and 1.7% in 2019. Against this background, the ECB’s confidence “that inflation will converge towards our inflation aim” is still much more based on wish than reality and facts. It is therefore not surprising that the ECB believes that overall, an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term.”

All options still available
“It was obvious that the ECB would not and could not really react to the ongoing trade tensions as there is simply speaking very little the ECB could actually do. Only once trade tensions or exchange rate volatility pose a risk to the growth and inflation outlook, would the ECB consider reacting. Therefore, it does not come as a surprise that the ECB today changed it communication somewhat. At the same time, we would not overestimate this change. Even after dropping the easing bias, the ECB still has all options to extend QE. Beyond September 2018 but also beyond December 2018. And let’s be honest, if the Eurozone economy were to suddenly enter a severe downturn, dropping the easing bias today would definitely not prevent the ECB from doing “whatever it takes”. Taking all these factors together, we remain comfortable with our expectation of at least one more extension of QE, beyond September 2018.”