Global daily insight 22 november 2016

Daily Insight

Group Economics Macro & Financial Markets Research

22 November 2016

ECB: hawks and doves pre-position Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

ECB view: Officials hit the wires ahead of the December meeting – In the run up to the Governing Council meeting on 6 December, ECB officials have been making their views clear. The Council already set the stage at the October meeting in December for major decisions regarding the future of the QE programme, which is scheduled to end in March of next year under the current guidance. In addition, Committees have been looking at options to increase the eligible universe of assets, while the updated macro staff forecasts will also be available. Our sense is that the ECB will decide to extend asset purchases at the current pace through to September 2017. The dovish members of the Council clearly outnumber the hawkish members of the Council and will likely push through an extension of monetary stimulus. Given the subdued outlook for core inflation, they also have the data on their side.

The hawkish talk – The most hawkish central bank in the eurozone has made its views known. The Bundesbank President Jens Weidmann said in a speech in Frankfurt on Friday that ‘most of the reasons for the current low rate of inflation are only temporary in nature’.

He noted that ‘the impact of the strong decline in oil prices is already beginning to be washed out of the inflation rate’ and that ‘what went down, will go up –- albeit at a modest pace’. Meanwhile, on Monday the Bundesbank talked up the outlook for the German economy saying that underlying cyclical momentum was ‘quite strong’. In addition, eurozone monetary indicators did not show the need for ‘more action’. Meanwhile, Executive Board member Yves Mersch said that the ECB’s unconventional policies should be seen as ‘temporary …and should therefore be withdrawn again as soon as possible’. However, Mr Mersch who is a swing voter with a hawkish tilt, also balanced these comments by admitting that ‘growth is still sluggish and the path of inflation is not self-sustaining, particularly with a view to domestic price pressures’.

The dovish talk – ECB President Mario Draghi led the more dovish commentary. In a speech at the European Parliament on Monday he made his usual call for ‘decisive support’ from other economic policymakers, asserting that there was a need for structural reform, while fiscal policies ‘should also support the economic recovery, while remaining in compliance with the fiscal rules of the European Union’. However, he also signalled clearly that a QE extension would be necessary, arguing that ‘the return of inflation toward our objective still relies on the continuation of the current, unprecedented level of monetary support, in spite of the gradual closing of the output gap’. Furthermore, on Friday, ECB Chief Economist Peter Praet – one of the most dovish members of the Council - warned that ‘material downside risks remain’ to the economic outlook. In addition, the ECB remained ‘fully committed to preserving the very substantial amount of monetary accommodation which is necessary to secure a sustained convergence of inflation towards our inflation aim’.

(Nick Kounis)

Insights.abnamro.nl/en

Bloomberg: ABNM

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Daily Insight - ECB: hawks and doves pre-position - 22 November 2016

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Daily Insight - ECB: hawks and doves pre-position - 22 November 2016