The ECB: How It Is Playing for Time

The ECB’s latest inflation forecasts show the central bank remains very cautious

By Richard Barley

European Central Bank headquarters in Frankfurt. Photo: Bloomberg News


Markets sometimes seem to believe Mario Draghi can almost walk on water. Just a few words from him can change the outlook drastically. Thursday’s appearance from the European Central Bank president was more a case of treading water.

The main challenge for Mr. Draghi, in the absence of any exciting new policy announcements, was to avoid spooking markets. He succeeded in the short term—moves in the euro, stocks and bonds were muted as he spoke. But there are still puzzles for investors to figure out.

The biggest surrounds the ECB’s forecasts for inflation. There had been an expectation that these forecasts would be shifted higher, in part because of the sharp increase in oil prices in recent months and because policy was loosened in March.

In the end, the forecast for 2016 was lifted marginally to 0.2% from 0.1%, while the 2017 and 2018 forecasts were left unchanged at 1.3% and 1.6%, respectively. A generous reading would be that at least the forecasts have stopped sliding; but they still signal that the ECB is falling short of its objective of returning inflation to close to 2%. They also show that underlying inflationary forces remain weak. Mr. Draghi in particular cited the absence of wage pressures.



The implication is either that the forecasts will need to be revised later this year—perhaps with the benefit of more evidence on the effect of the ECB’s expanded stimulus measures—or the central bank might yet need to deliver even more stimulus. That is even though Mr. Draghi was eager to argue that current policy and measures yet to be implemented, such as corporate bond purchases and a new bank lending program that start in June, are having an important effect.


September now looks like a key meeting. It will mark the publication of another set of forecasts and comes six months before the end date announced for asset purchases. Mr. Draghi underlined again that these purchases could be extended if necessary. With just six months of the program left, markets will be eager to know how long an extension might be.

The ECB looks to be playing a long game. Mr. Draghi at one point waxed near-philosophical on the ECB’s policy settings. “For interest rates to be higher tomorrow, they have to be low today,” he said.

At the moment, tomorrow looks a very long way off.

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