More of the same
After last month’s TLTRO announcement and clear dovish message, the ECB is – yet again – in a ‘wait and see’ mode. The press conference after April’s meeting did not contain any big surprises. Draghi acknowledged continued weakness in growth momentum and confirmed the balance of risks is still skewed to the downside.
No further details on TLTROs were revealed but Draghi made it clear that the pricing decision will be based on the assessment of the bank-based transmission channel as well as economic developments in the meantime. This conditionality presumably leaves the ECB with some room for manoeuvre in the case data or markets surprise on either side and necessitate a policy response in the near term.
Our base case for the Euro area is that growth momentum will stabilise and pick up modestly through the year, even though it is too early to declare the ‘all clear’ on the current slowdown. Over the past month, data has been somewhat mixed. The weakness is still concentrated in the externally exposed parts of the manufacturing sector, while services-related activity and more domestically exposed sectors have continued to show resilience. As external headwinds subside and the outlook for growth and inflation improves moderately over the next few months, the ECB will likely start considering raising rates back to zero.
However, this is a story for 2020. In the case of further significant data deterioration, big policy decisions will have to be made by the ECB, with yield curve control and quantitative easing on the menu – but this remains unlikely for now.
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