Judging by the reaction of the markets, the press conference by the President of the ECB this week was not a major event.
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The ECB remains cautious in its assessment of the economic situation, stressing that risks remain on the downside, but less than before due to the trade agreement between the United States and China. The message is slightly better regarding core inflation, which there are signs of moderate increases. By the end of the year, the strategic review, which has now been launched, will attract the full attention of the markets, which are wondering if it could influence the stance of monetary policy. This re-examination of the strategy is also important from the point of view of climate change: will monetary policy operations integrate it among the risk factors or will ambition go further?
Judging by the reaction of the markets, the press conference by the President of the ECB this week was not a major event. The Euro Stoxx 50 index hovered around a narrow range of around 0.15% and the 10-year Bund yields eased by around one basis point. This lack of volatility is not surprising. First, monetary policy is expected to remain unchanged for a long time, and second, the message on the economic situation remains cautious. At the December meeting, the ECB noted that “the most recent economic data and survey results, if overall weak, indicate some stabilization of the slowdown in economic growth in the euro area”. The message now is: “Economic data and survey results point to some stabilization in growth dynamics in the euro area, with short-term growth expected to remain close to levels seen in previous quarters” . The change in appreciation is minimal – the passage “if they stay broadly weak” has been removed – however, and it is important to note, no rebound in growth is expected in the short term. In addition, risks remain on the downside, even if they are now less pronounced since the decrease in uncertainty surrounding trade. The Governing Council will, of course, welcome that “some signs of a slight acceleration in core inflation have appeared, in line with expectations”. Still, the outlook for inflation remains gloomy.
Given a monetary policy locked in a forward guidance linked to the state of the economy and the very slow evolution of the data, attention turns to the strategic review which has been officially launched, a vast project to the height of the importance of exercise. The key question is whether the mandate of the ECB, while remaining narrow – namely, maintaining price stability – will be reformulated. One possibility would be to make it explicitly symmetrical. This would involve deleting the term “lower” from the widely quoted passage “We anticipate that they [les taux d’intérêt directeurs] will stay at their current levels or lower, until we find that the inflation outlook is lastingly converging to a level close enough to, but below 2%. “
The decision would have a significant impact on expectations of key rates and would advance the date of the first expected rate hike. The challenge for the institution is also to examine how to integrate the climate challenge into monetary policy. The overwhelming number of questions on climate change during the press conference is in part linked to the ambition expressed by the President of the ECB in her recent statements and to the European Parliament. These many questions also reflect the impatience to see how far the mandate will go: risk control in the context of financial stability or something more ambitious in the context of monetary policy decisions, such as steering the relative valuation of financial assets – “green” assets versus other assets – or the exercise of an influence on the direction of credit flows?
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