ECB Meeting: Increased Alertness

The European Central Bank has woken up to the new reality of increased uncertainty, and become more dovish in the process. At the same time, the bank has indirectly suggested that it's as much in the dark about the growth outlook as anyone else.

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European Central Bank HQ, Frankfurt 

Today’s ECB meeting did not bring any new action but marked a clear change in the ECB’s growth assessment. While back in December, the bank's growth outlook for 2019 was still very upbeat- forecasting 1.9% GDP growth- it's now less optimistic. In fact, the ECB has finally caught up with reality. Reality is not yet a protracted slowdown but rather an unprecedented list of possibly severe uncertainties. This list is well-known: global trade tensions, a Chinese slowdown, the German automotive sector, and Brexit. These risks are not new but ECB President Mario Draghi stressed that the ECB’s biggest concern now is that these risks could materialize and he is concerned about the persistence of general uncertainty. The latter clearly runs the risk of becoming a self-fulfilling prophecy, eventually undermining still solid domestic demand through a negative sentiment loop.

At the same time, Draghi also said that a part of the ECB’s Governing Council still does not exclude a more benign outcome and also stated that the probability of a recession was still low. In sum, the increased uncertainty, as well as the persistence of the uncertainty, motivated the ECB to shift its balance of risks to the growth outlook to the downside. To be precise, the ECB used a small linguistic trick, stating that “the risks have moved to the downside”. This is slightly stronger than the December “risks are moving to the downside” but not necessarily as strong as the usual “the balance of risks is tilted to the downside”.  A small but significant detail. Welcome to the world of ECB watchers.

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