20.01 Weekly Viewpoint : The ECB Governing Council’s January meeting was entirely interlocutory

As could reasonably be expected, the ECB Governing Council’s January meeting was entirely interlocutory. The commotion caused by the rise in German inflation is by all means premature – and in any case the euro area as a whole would benefit if Germany experiences a phase of higher inflation than in the rest of the area…..

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The ECB meeting came to an end, as expected, with no changes to monetary policy. The ECB reasserted that asset purchases will continue until December 2017, and in any case until inflation is back in line with the 2% target; it also reasserted once again that purchases may be stepped up if the macroeconomic picture deteriorates, and/or financial conditions become more restrictive; lastly, forward guidance on policy rates was again confirmed. In an ad hoc statement, the ECB specified that purchases of assets with a yield lower than the deposit rate will not include ABS covered bonds and corporates.

During the press conference, Draghi reasserted that the December decisions should not be read as the start of an unwinding of the APP, and assured that a tapering of purchases in case of an unexpected improvement of the cycle has not been considered. Therefore, the inflation bias was confirmed. The statement specified that for the time being there seem to be no pressures on domestic prices, and that the ECB will look beyond inflation rises triggered by energy price increases and base effects.

To be more precise, the ECB pointed out three conditions for inflation to be considered as in line with the medium-term goal:

1) an increase in the medium term;

2) stable or lasting convergence towards 2%; and

3) an increase capable of proving resilient even once ECB stimulus is removed.

For the time being, the Council continues to consider ultraaccommodative financial conditions as necessary to guide the trend of domestic prices towards the target rate. The statement also stresses that risks to the scenario remain skewed to the downside, and are mostly tied to the external context. Draghi specified that there was unanimous agreement at the January meeting on the fact that the measures adopted in December were the right ones to guarantee respect of the ECB’s mandate and to foster the recovery in the euro area.

Draghi invited the Germans to be patient and to confide in the fact that as the recovery consolidates across the euro area, the German economy will benefit as well, and rates will be able to rise. On the whole, the ECB has made significant efforts in dissipating the doubts, ingenerated in the past few days by the most impatient factions of the market, on the sustainability of the December measures against a background of a faster inflation trend, especially in Germany. However, it would have been simply absurd to call everything back into question solely in the wake of current inflation data. Furthermore, if Germany experienced a phase of domestic revaluation, in the form of a stronger wage and price trend than the average for the rest of the euro area, the euro area as a whole would only benefit, in terms of its internal rebalancing. It should not be forgotten an imbalance is always caused by two sides, and that the side that generates structural excess savings was also responsible for generating the imbalances that preceded the debt crisis. At the present stage, with peripheral countries showing current account surpluses again, the real residual anomaly are the huge current account surpluses shown by Germany and the Netherlands. A more symmetrical rebalancing would avoid the deflation bias which characterises the economic policy rules the euro area has imposed on itself.

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