ECB: Dovish Gamble

With new TLTROs and a change to the forward guidance, the European Central Bank (ECB) today tried to get ahead of the curve. The measures demonstrate the ECB’s determination but will do little to tackle the drivers of the current slowdown.

Source: Andrej Klizan

In its macro-economic assessment, the ECB has finally arrived in the Eurozone’s new reality of elevated uncertainty and downward revisions to growth expectations. This is not really surprising, given that the ECB’s growth forecasts from last December have always looked very optimistic. In today’s meeting, the ECB made clear that it still sticks to a rather optimistic base case scenario of a gradual recovery mainly on the back of solid domestic demand. At the same time, however, the slowdown, mainly stemming from temporary and country-specific factors, “is turning out to be somewhat longer-lasting”.

New ECB projections

According to the latest ECB staff projections, GDP growth is now expected to come in at 1.1%, 1.6% and 1.5% in 2019, 2020 and 2021; in the December projections, these were 1.7% in 2019 and 2020 and 1.5% in 2021. The Bloomberg consensus forecast from private sector contributors is currently at 1.4% for 2019 and 1.5% for 2020. The OECD just yesterday revised its growth forecasts down to 1.0% and 1.2% respectively and the European Commission expects 1.3% GDP growth in 2019. Interestingly, despite the downward revisions of the growth forecasts, the ECB still considers risks surrounding the growth outlook to be tilted to the downside.

Inflation is currently not the most pressing issue for the ECB. It rather seems to be a derivative of economic developments. The bottom line remains a very gradual increase in headline inflation but a clear missing of the ECB’s target. As regards inflation, staff projections now foresee headline inflation to come in at 1.2%, 1.5% and 1.6% for 2019, 2020 and 2021 from 1.6%, 1.7%, and 1.8%, respectively, in the December projections.

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