ECB will not change its course for the time being

During the press conference, after the meetings, there were some elements that allow us to form a better picture of the policy that can be expected from Frankfurt later this year (and next year).

For example, the ECB President noted that during the meeting there was no discussion about a possible exit strategy, i.e. how should the ECB get out of the current monetary constellation? When will this start? And how quickly should that operation be carried out? According to Mario Draghi, president of the ECB, there is "no need to talk about that yet."

Clear instructions
The board also underlined once again that it is ready to step up the purchasing policy (aka quantitative easing or the QE policy), both in terms of size and duration, should expectations about inflation in the eurozone deteriorate. These are all clear indications that the ECB is in no hurry to change its monetary stance. 

And then Draghi had another important revelation about the content of the discussion within the board. That revelation is important for the assessment of the course that the ECB will follow in 2017 and 2018, and even 2019. There are board members who felt that the recent better reports from the economic growth front were so strong that they felt that the ECB could do with sounding a bit more optimistic. That's what Draghi said.

From this information one could deduce that the board is building up pressure to stop buying government and corporate bonds sooner than the market expects. One could also deduce that the ECB plans to raise official interest rates sooner than the market expects. However, that disagreement existed in the discussion about economic growth. All board members agreed on inflation. 

That is an important piece of information, because the board ultimately makes decisions based on the outlook and expectations about inflation. Economic growth is of course important, but only as part of the picture regarding inflation in the monetary union. 

What does the above mean in concrete terms, even if we put it on an imaginary timeline?

Future course
The purchasing policy will continue for the entire year and will, in the best case scenario, be slowly phased out from January 2018. To be completely dismantled at the end of 2018. That is only if nothing happens in the meantime, which could worsen the prospects for economic growth and inflation.

If that does happen, we can safely postpone the timing of the further reduction of the purchase program and its eventual dismantling by a few months. These prospects may deteriorate if, for example, the oil price rises, the global economy grows less rapidly or geopolitical unrest arises in the world. The latter may arise from the tension between the US and North Korea.

If developments in the world economy were to turn out better than expected and the economic recovery in the euro zone would take hold, we should not immediately conclude that the chance of a previously expected dismantling of government bond programs and a first interest rate increase would increase. As noted earlier, inflation expectations and their interpretation by the ECB board are decisive. There is much to indicate that the government is not eager to make monetary policy less loose. 

Not only the comment that talk about an exit is out of the question, but also the warning that the duration and extent of QE could be increased, sends a clear message. The other possibility, that the bank can phase out QE sooner, is not even mentioned. Add to this that the ECB also continues to say that it wants to keep official interest rates 'at current or lower levels for a long time and considerably longer after the buying of government and corporate bonds has stopped.' It is also clear that the bank is not waiting for an exit. As long as the bank maintains a lower level, we should see that as an indication that an interest rate increase is not around the corner for the time being.

Roadmap
It would not be surprising if the ECB further increases its confidence in the economic recovery over the coming months. When the bank's economists release new estimates for economic growth and inflation in June, it would not be surprising if the board sees the risks to economic growth in balance. This means that the chance of better than expected development is considered to be as high as the chance of a setback. 

However, this will not mean that the ECB will move to make its monetary policy less accommodative. Rather, it will pave the way for the ECB to then do the same with inflation. So first report that there are indications that inflation may climb towards the target rate of slightly below 2 percent (in the medium term), and later strengthen that expectation.

Then and only then will the bank omit the aforementioned phrase 'or maintain a lower level' from the statement. This is something that would be an early indication that the bank will soon start talking about an exit strategy. However, before we get there, we will probably be a long way towards Christmas and New Year's Eve.

The order of steps to be taken in an exit remains:

1. Stop QE.
2. Take a break to see how the economy responds.
3. Start talking very carefully about an upcoming interest rate increase.

Stop the QE is. in the best case scenario, this is not expected until sometime well into the second half of 2018. With a pause between that moment and the first interest rate increase, the ECB's first interest rate increase is not expected until sometime in the summer of 2019. If it doesn't get later.

And then it still applies that interest rates will rise very slowly and carefully. Once again the Fed is a good example of how slowly that will happen. The US Central Bank stopped QE years ago, but so far the official interest rate has only been increased 3 times. 

For the time being, both long-term and short-term interest rates in the euro zone will remain very low for a very long time.