The ECB monetary policy is too tight

Mario Draghi said the ECB was ready to act if necessary.

But there is something I don’t understand: the ECB revised down its forecasts for growth and for inflation for this year and the 2 years to come. Growth will barely converge to 1.4% in 2021 and the inflation rate is expected to be at 1.6% for the same year(way below the ECB target).

Can it be satysfying ? No, this level of forecasts are too low.

This means that the Euro Area has not been able to cushion the external negative shock. If there is still leeway on monetary policy side this means that the current stance is too tight. Today’s forward guidance on future monetary policy measures is not sufficient to reverse the trend. Need more

What to expect next week ?

What do I expect as being important next week: 7 points at least
Markit and ISM indices in the manufacturing sector (June 3)
German Industrial Orders for April (June 6)
US employment for May (June 7)
Euro Area inflation rate for May (June 4)
 ECB meeting (June 6)
Trade war (no specific date)
Inversion of the US yield curve
The document is available here What to expect Next Week June 3 – June 7 2019

The ECB ready to maintain its accommodative policy in 2019

The ECB puts all its energy on it but inflation does not converge frankly towards the objective (2%) it has defined. Can we say, like Mario Draghi, that the Quantitative Easing has worked properly?
Yes probably on the activity. The fall of all the interest rates has modified the inter-temporal trade-off on consumers’ side favoring the immediate expenses to the detriment of the future expenses.
On inflation? Yes, if the recovery helped to avoid deflation but beyond? We can wonder. Convergence towards the ECB’s target is postponed year after year.
Forecasts on growth (convergence towards potential in 2021 estimated at 1.5% by the ECB) and on inflation, suggest, except to change the reaction function, that the ECB will remain accommodative for a extended time.

The ECB will be unable to normalize its monetary policy soon

The ECB will not start the normalization of its monetary policy in 2019. The interest rate level will remain stable, my bet is that the refi rate and the deposit rate will remain at the current level in 2019.
The lack of external impulse, the slower momentum in the manufacturing sector and the convergence of the headline inflation rate to the core inflation rate are three reasons that suggest that the ECB will not take risks in the management of its monetary policy. The monetary policy normalization, even the expectation of it, may weaken economic activity. Therefore it’s not the good policy when the inflation rate is way below the ECB target with no convergence to the target in a foreseeable future.

The framework I have in mind is the following: Due to more heterogeneous behaviors and uncertainty at the political level, global growth will become, in 2019, weaker than in 2017 and in 2018. Inside the Euro Area, there are no coordinated policies that may boost growth, therefore growth trajectories will converge to potential growth. This framework is not a source of monetary policy normalization. But we can add that the dramatic oil price drop in recent weeks (due to excess supply in the US and in Arabia) will push the headline inflation rate to the core inflation rate which has been close to 1% for months. It’s still way below the ECB target and therefore not a source of monetary policy normalization.  Continue reading

Angela Merkel’s Smart Move

According to the German newspaper Handelsblatt, Jens Weidmann, the current president of the German Bundesbank, will not be Merkel’s candidate at the head of the ECB in October 2019. Mario Draghi will leave the ECB presidency at this date.
This can be surprising but it is not. It’s the most rational decision for Germany.
The ECB strategy is often looked through the lens of the Bundesbank. We are all attentive to the German point of view. The German central bank is perceived as ultra orthodox on monetary policy and Germany is the largest and the most powerful country of the Eurozone. These two reasons suggest that there is no need of a German president. The Bundesbank president and the accumulated credibility of the Bundesbank are sufficient to condition the ECB’ s behavior. A German president would be redundant.
Germany can therefore choose a German candidate for another job at the top of an other European Institution and extend its influence.
Well done Angela