As widely expected, the European Central Bank kept the parameter of its monetary policy and forward guidance unchanged at today’s meeting. However, the ECB acknowledged that recent indicators point to a moderation in growth momentum whilst remaining consistent with a solid and broad-based expansion of the euro area economy. The ECB remains convinced that the strength of the economy will push inflation back to target but acknowledges: “underlying inflation remains subdued and is yet to show convincing signs of a sustained upward trend.”
Although the ECB struck a balanced tone, acknowledging that growth is slowing but should continue, the central bank is somewhat nervous. This justifies the cautious approach taken by the ECB. Incoming data will be important as it could potentially delay some of the expected stimulus reduction, especially if it were to signal a slower pace of convergence of inflation toward the ECB target. Nevertheless, we agree with the ECB’s cautiously optimistic view and continue to believe the ECB will end its asset purchase programme this year and that the first rate hike is unlikely before mid-2019.