No significant developments emerged from the meeting of the ECB Council………
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For now the focus is on the implementation of purchases of corporate bonds which will start on June 8 and the launch of TLTRO II. However , the Council has not lower the guard and stands ready to respond to all contingencies , including even an excessive markets’ reaction to the British referendum.
The ECB acknowledged that the balance of risks for the macro outlook has shifted marginally on the upside, compared to the April meeting. The stronger than expected Q1 GDP growth may not be repeated in the Spring, as suggested by latest survey data. Beyond quarterly data volatility, the assessment is that euro area recovery is firming up and will continue at a moderate pace, supported by domestic demand. The cautious judgement is reflected in the new staff projections, which revised GDP growth upwards in 2016, but maintained it unchanged in 2017 and cut it by 0.1 to 1.7% in 2018, on slower private consumption. Risks for growth are still on the downside and these stem from emerging markets prospects, the approaching Brexit referendum and in general geopolitics. Regarding inflation, surprisingly, the new staff estimates revised upward only 2016 HICP inflation to 0.2% but the projections for 2017 and 2018 are unchanged at 1.3% and 1.6%. The impact of higher oil prices (by 9 $ per barrel a year compared to March) underpinning the forecasts was offset by downwards revisions to core inflation by a tenth per year in 2016-18, which is motivated by the lack of wage acceleration in most countries, with the exception of Germany. The ECB considers that so far there has been no second-round effects on underlying prices but did not exclude that these could occur in the coming months. Thus, risks for inflation remain on the downside. Draghi explained that “the probability mass of the risks for inflation estimates has shifted slightly up”. We think that, the downward revisions to core inflation are a clear indication that the ECB prefers to be surprised on the upside rather than on the downside as it has been the case for the past four years. The revisions leave the door open for an increase in the monetary policy stimulus, if needed. The introductory statement, and Draghi during the press conference, reaffirmed that the Council is now waiting to see the effects of the measures already in place but remains ready to react “without delay” to any negative contingencies, including the consequences of a victory of the leave front at the British referendum. The focus is now on the implementation of the measures already in place, the effect of which will be seen over time. The ECB has confirmed the launch of the corporate bond purchases on the 8th of June and the first TLTRO II on 22 June. However, in case of an unwanted tightening of financial conditions, caused by a sustained increase in financial markets volatility following the British referendum the ECB may consider to cut the deposit rate by 10 basis points.
Regarding the possible reinstatement of the waiver for the eligibility of GGBs as collateral, Draghi stated that the ECB will take a decision only after the formal completion of the review, i.e. at its next meeting.
Appendix
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