Janus Henderson: Three P’s at the ECB meeting

April’s ECB meeting was very much a case of ‘let’s reconvene in June’ as the ECB President Draghi delivered a statement and press conference characterised by the absence of any fresh insight into the governing council’s views on their monetary stance.

We headed into today’s meeting against a backdrop of softening, albeit modestly, economic and inflationary data in the eurozone, with external geopolitical threats on the rise. However, those who were hoping for Draghi to betray fear of a pronounced slowdown were left disappointed as he repeated the phrases “caution, tempered by an unchanged confidence” and “patience, prudence and persistence” to emphasise that while the council were monitoring events closely, they were satisfied that the bloc’s recovery would endure. The mask very briefly slipped when Draghi described the slowdown as broad-based across regions, sectors and hard and soft data. However, the contention that this slowdown has occurred during a period of above-average growth, and is partially due to several temporary factors, soon put paid to the idea that this was a cause of grave concern for the council.

Those who were expecting further detail on plans to end the ECB’s asset purchase program were likewise disappointed, as Draghi’s comment that “monetary policy was not discussed” at the meeting was superficially jarring. It simply served to re-emphasise that the council was prepared to take a wait-and-see approach to determine whether this dip is transient, or the start of something more insidious. The one other cloud on their horizon was the potential for escalating global trade tensions. Draghi was content that currently announced measures would have a negligible impact, while stating that the magnitude of any retaliation was the known unknown.

At his final meeting, Vice President Constâncio expressed optimism around the non-performing loan (NPL) environment of the Euro area’s banks, which remain on a downward path. He signed off with a caution that we shall most likely never be able to go back to a world where central banks operate with small balance sheets and simply target the overnight rate. The increased financialisation of the economy, has seen to that.

In truth it was clear that investors were not expecting anything more than what was delivered, with core bond markets largely unchanged, as was the euro. Expectations surrounding the next ECB meeting will surely be elevated simply by virtue of the fact that we shall be that much closer to the putative end date, in current form at least, of the asset purchase program. That will be a much finer line for the president to tread.