ECB: Dovish with a hawkish blend

Today as expected the European Central Bank left interest rates and its QE programa unchanged. According to Carsten Brzeski, Chief Economist at ING, Draghi presented a dovish message but did not forget to throw some bones to the hawks.

Key Quotes:

“Today’s main message from the ECB was: the economy looks a little bit better, there are still no signs of durable inflation and we are not changing anything now. This compressed message was the result of a slightly better assessment of the Eurozone economy than in January.”

“Regarding the recent increase in headline inflation, the ECB repeated that it would “look through changes in HICP inflation if judged to be transient”; a clear signal that the ECB considers the current increase in headline inflation a temporary phenomenon. This view was supported by the staff projections, which envisaged annual headline inflation at 1.7% in 2017, 1.6% in 2018 and 1.7% in 2019.”

“In the course of the press conference, it almost seemed as if some hawks were sitting under Draghi’s desk and were fiddling with his papers. On some critical questions, Draghi needed more time to find his notes and arguments than usually. It was probably no coincidence that his answers became a bit more hawkish. He threw some bones to the hawks by stressing that the ECB no longer had a sense of urgency of taking further actions and that no fresh TLTROs had been discussed. Draghi even dodged the question on whether the ECB might raise interest rates before the end of QE.”

“All in all, the ECB keeps its easing bias but has also started to gradually incorporate some hawkish sounds. This strategy is preparing the grounds for a tapering announcement after the Dutch and French elections if growth and inflation follow their current paths, but keeps all options open if the current optimism turns out to be unjustified.”

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