The European Central Bank (ECB) gradually tweaked its forward guidance to a less dovish stance at its March meeting, dropping from its policy statement the phrase: "if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase the asset purchase programme (APP) in terms of size and/or duration".
The removal of this explicit phrase is widely viewed by some as the removal of its easing bias, which is reasonable given the strength in economic momentum. Note that the ECB only removed the wording on the need to increase APP, but is reluctant to provide more clarity on the end date of quantitative easing (QE) at this point. This subtle tweak in language suggests the ECB is being cautious in terms of communication on monetary policy normalisation. The euro and bond yields initially jumped when the statement was released, but fell back after Mr. Draghi downplayed the significance of the language change and highlighted the soft inflation outlook at the press conference. So, the ECB skilfully weakened its easing bias without upsetting the markets last week.
Given the strength in the euro (from the weak US dollar), the hung parliament situation in Italy and heightened risk of trade protectionism, the ECB likely wants to avoid projecting an overly hawkish stance at the moment. However, we think the ECB remains on course to normalise policy and will deliver a more decisive tone in June. We expect the ECB to conduct monthly asset purchases of €30bn until September 2018 and then wind down the QE programme, with the first rate hike around mid-2019. Overall, the monetary policy stance is likely to remain accommodative in the medium-term, as the ECB is likely to continue reinvesting maturing securities, and we expect interest rates to remain very low in the foreseeable future.
For macroeconomic forecasts, the ECB made minimal change to its growth and inflation forecasts. Positively, 2018 GDP growth was revised up by +0.1% to +2.4% (vs. projections in December 2017) with the ECB statement highlighting the broad-based and sustained nature of growth in the region. Looking at inflation, the 2019 headline Harmonised Index of Consumer Prices (HICP) was revised down by -0.1% to +1.4%, with an upward revision to euro exchange rate assumptions.