The three biggest takeaways
The ECB meeting in January was perceived as hawkish by many market participants even though the bank's president, Mario Draghi, had in our view sounded rather dovish, particularly when referring to the stronger euro. The latest minutes of the January meeting will do little to extinguish the fire as they provide more evidence of a growing divide within the ECB’s Governing Council; at least on the future path of QE, not on rates. Here are the three most interesting aspects of the minutes:
1 Inflation pick-up still more wishful thinking than reality
The wording of the inflation assessment reflects a very cautious stance by the ECB. “Overall, with inflation convergence proceeding only gradually, patience and persistence in monetary policy remained warranted. An ample degree of accommodation was still needed for inflation pressures to build up and support headline inflation developments in the medium term...The discrepancy, also observed in other major economies, between the ongoing expansion in economic activity and relatively subdued inflation dynamics was again highlighted.“
2 Dissenting views remain
Apparently, some ECB members already proposed to remove the easing bias on QE at the January meeting. “Some members expressed a preference for dropping the easing bias regarding the asset-purchase program from the Governing Council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment of the path of inflation,” the account said. “However, it was concluded that such an adjustment was premature and not yet justified by the stronger confidence.”
3 First sneak preview of life after QE
Looking beyond an eventual end of QE, the ECB discussion suggests a very cautious approach towards rate hikes or balance sheet shrinking. This was nicely reflected in the phrase “from that point in time [end of QE], the evolution of inflation would remain conditional on the reinvestment of principal payments continuing for an extended period of time and on policy rates remaining at their present levels well past the end of net asset purchases.“
Despite the noise the minutes of the December meeting made, today’s minutes to a large extent repeated the language from those made at the end of the year, arguing that even though an adjustment of the communication was now premature, the ECB could review its stance early in the year. A very strange compromise, given that there will only be one more ECB meeting (in early March) which would qualify as “early in the year”: A clear sign that the Governing Council is currently divided.
The fact that some ECB members pledged for a removal of the easing bias on QE also illustrates diverging views.
Looking ahead, the growing divide within the ECB will do little to soften ongoing macro volatility. However, we still think that the large majority at the ECB still opposes an abrupt end to QE in September as well as a change of forward guidance at the March meeting. In fact, even the idea of gradually changing the communication and forward guidance looks less compelling at second glance. Why? Because there is very little the ECB could do to gradually change the communication.
In this regard, the only option would be to drop the easing bias on QE. For the rest, every wording change at the current juncture would be considered a huge step, at least by most market participants. Consequently, the ECB will in our view refrain from changing its communication for as long as possible. As soon as the ECB would put an end date on its QE programme, speculations about the timing of the first rate hike will start to heat up, leading to a further tightening of monetary and financial conditions in the Eurozone.
All of the above means that we still feel comfortable with our working assumption that the ECB will extend its QE programme once more at a lower monthly level until December. It should then take another six months before the ECB would hike rates for the first time. Nevertheless, the growing divide within the ECB could make this path towards the exit rather wobbly.