In a performance that sums-up his term at the ECB, Draghi delivered something for everyone at today’s
press conference. As expected, the overall message was not fundamentally different from the meetings
earlier in the year: the recovery is fragile and the risks around the outlook are high, low inflation is
a worry, and the euro area continues to require a substantial degree of policy accommodation. In fact,
much of the press conference was spent by Draghi reiterating that the ECB still has plenty left in its
arsenal to support the economy if it becomes necessary. From introducing tiering and cutting rates
further to restarting QE, every option has been discussed and remains on the table. And yet, when all was
said and done, the measures announced today were clearly less dovish than some had expected, with Draghi
firmly pushing back against the market’s speculation that the ECB was preparing to take further easing
In terms of today’s meaningful actions, the ECB’s new forecasts, its forward guidance and the conditions
of the new TLTRO appear to be designed almost as a direct challenge to the markets which have become
entirely preoccupied with the idea that the global economy is on a brink of a recession. Much will
clearly depend on whether the US-China dispute escalates from here, and the ECB may yet reverse course.
But, at the moment, rather than panicked, the ECB appears almost bemused that market sentiment and
perceptions of where rates could go from here seem to be driven by a single issue of a trade dispute
which doesn’t directly involve the euro area.
As an acknowledgment of the fact that risks
around the outlook remain elevated and are unlikely to dissipate quickly (Draghi made the point that
while in March there was some hope the US/China and Brexit could be resolved quickly, this is not the
most likely outcome anymore), the ECB amended its forward guidance and extended the time horizon for
interest rates to remain at their present level “through the first half of 2020”. The key takeaway here,
of course, is that this wording directly pushes against the prospect of rates being cut over this period,
which is what the markets were starting to price in. Mid-2020 also provides Draghi’s successor with a
convenient Goldilocks (not too long, not too short) period before further changes to guidance may need to
In terms of the forecasts, as expected, 2019 GDP numbers were
bumped up a touch on the back of better than expected growth in Q1; while core inflation numbers for this
year were revised down. More importantly, however, the ECB left its 2020 and 2021 core inflation
forecasts unchanged. This is an important development as far as the new ECB Chief Economist Philip Lane
putting down a marker: the markets should pay less attention to its own measures of inflation
expectations, and more attention to the fundamentals such as falling unemployment, stronger wage growth,
as well as broader measures of inflation such as the GDP deflator. For instance, today’s Q1 data showed
that, in aggregate, euro area GDP deflator had now risen by 0.4% QoQ in each of the last four quarters -
this compares to readings of 0.2%-0.3% in the previous three plus years. Also, in Q1, both the French and
the Italian GDP deflator printed the strongest reading since 2015. And the German GDP deflator is now at
over 2% YoY for the first time since Q1 2015. This will not be on the market's radar but will matter to
the Governing Council and help give it confidence that inflationary pressures in the economy are
Finally, with regards to the new TLTRO, the ECB delivered exactly what
it said it would deliver earlier in the year – offering banks loans on less generous terms than in
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