Since the beginning of 2018, the expectations of the policy that the European Central Bank (ECB) will implement in 2018 and 2019 have been significantly adjusted. For example, the bank will stop buying government and corporate bonds (quantitative easing) this year, and then raise interest rates in the spring of 2019. In addition, it was even said that the bank will make borrowing more expensive this year.
These expectations were confirmed on Thursday, March 8. The bank had removed 1 sentence from the press statement on that date, namely the fact that it 'has the option to increase the purchase of government and corporate bonds'. This was immediately noticeable, because the bank had mentioned that promise in the statement since 2016.
The omission of that phrase occupied a prominent place in the various reflections on the meeting. Many saw this as preparatory work for the complete phasing out of the purchase program and for the interest rate changes. However, that conclusion seems premature to me.
Where did the bank leave it out?
It is true that the bank no longer gives us black and white instructions to increase the purchase program, but it did reiterate that the purchase program will be extended if that is really necessary. An example of this is if inflation expectations were to change in such a way that the ECB's target (around 2%) became further away than is currently the case.
Why then did the ECB omit the phrase? In my opinion, this is nothing more than a kind of giveaway for a large majority in the ECB board. That majority would have supported buying up bonds. To keep the peace in the tent and to give that group of opponents something with which they could go home satisfied, they received that symbolic victory. Symbolic victory, because as mentioned, virtually nothing has changed.
The fact that the omission of the phrase was the most important thing about the meeting is, in my opinion, incorrect. This was confirmed when Draghi said 2 innocent sentences afterwards. These were anything but symbolic, but speak volumes about the expected course of the ECB.
Inflation has an impact
It is primarily about the fact that the ECB cannot yet declare a victory over inflation. In other words: it is far from certain that annual inflation will rise to the desired level in the medium term. For example, the latest estimates from ECB economists show that inflation this year and next will be slightly lower than the ECB expected in December.
With an expected inflation rate of 1,4%, the bank continues to score unsatisfactory; the task is to get and keep inflation close to 2%. So that won't work. Even in 2020, the flag in Frankfurt cannot go out. In that year, economists expect monetary devaluation to amount to 1,7%. It's getting closer, but it won't be quite there yet.
Policy remains reactive
The second crucial sentence was when Draghi said: "The ECB's policy remains reactive and not proactive." This is telling. A central bank that pursues a reactive monetary policy responds to developments. In addition, it is, as the Americans like to say, 'behind the curve'. In other words: that bank thinks: "We will cure the disease when it occurs." The ECB has no plans to 'get ahead of the curve' any time soon.
In concrete terms, this means that the ECB will only gradually reduce its purchasing of government and corporate bonds this year. She wants to stop it completely in December or January 2019.
Interest rate increases
In my opinion, the first interest rate increase can be expected at the earliest in October 2019. Not only because the time is ripe (quantitative easing will then have been stopped for 9 months), but also because Draghi will have to raise interest rates at least during his presidency. will want to increase once. He must leave the bank in November 1.
In this environment, EURIBOR rates will remain at current levels for the time being and long-term interest rates will slowly rise. Why? More about that early next week in a new video update.