eco TV Week

ECB: More confident, still prudent

6/30/2017

The ECB communication maintains a certain ambiguity over the direction of monetary policy. This permits to avoid too abrupt a transition from easing to normalisation.

Thibault MERCIER

TRANSCRIPT // ECB: More confident, still prudent : June 2017

The ECB communication is an exercise becoming increasingly challenging. On the one side the central bank is showing more and more confidence about the solidity of the recovery: it has recently upgraded its GDP projections as well as its risk assessment. But on the other side the central bank remains very cautious when it comes to inflation development

The speech pronounced this week by Mario Draghi perfectly illustrates this balancing act and the difficulties it entails. The President has shown strong confidence on the monetary policy efficiency: the decline in interest rates has triggered a solid economic growth, deflationary pressures has disappeared and should gradually be replaced by reflationary forces. The ECB stands ready to accompany the recovery that is to say to increase interest rates in line with inflation in order to maintain a constant monetary stance.

The confidence expressed by Draghi has been interpretated by the markets as a sign of imminent monetary tightening. The euro surged against the dollar. Yet, the speech also underlined the need to be persistent and prudent given, in particular, the real extent of labour market underutilization. In other words, inflation should gradually pick up but it could take more time than currently forecast.

Finally, such communication maintains a certain ambiguity over the direction of monetary policy. Still, this stance comes with an advantage: the positive effect of avoiding a too abrupt transition from a resolutely accommodating ECB (as has been the case since mid-2014) and an ECB equally resolutely committed to the path to normalisation (which would seem premature).

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