Update: the all-important inflationary forecast has been raised modestly, as follows: 2017 from 1.3% to 1.7%, 2018 from 1.5% to 1.6%, 2019 kept unchanged at 1.7%. He also said the council will continue to look through changes in inflation if judged to have no implication for medium-term outlook for price stability, and notes that substantial degree of monetary accommodation is still needed. As usual, he adds that the "ECB stands ready to increase asset purchase program in terms of size, duration."
Draghi also revised GDP slightly higher, pushing 2017 from 1.7% to 1.8%, 2018 from 1.6% to 1.7%, and keeps 2019 at 1.6%
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Leaving rates unchanged (no surprise) and maintaining his dovish forward guidance, Mario Draghi has a tough job this morning to paint a picture of a European economy with "downside risks" which means he has to keep buying everything while every asset-gatherer in the world is crowing of Europe's comeback (rising growth, surging inflation, falling unemployment). We are sure the ex-Goldman partner will find a way to justify "lower for longer."
As we previewed earlier, however, the press conference won’t be boring.
Deutsche Bank expect hints of a slow and gradual evolution to a less-dovish policy stance. This could come in different ways. First, we expect a less downbeat “balance of risks” (BOR) to the economy with a description of a firmer, broader and more resilient economy. Second, the Forward Guidance could be amended to remove the option of reducing policy rates further. Third, the ECB could remove “very” from the statement that “a very substantial degree of monetary accommodation is needed”.
This is likely to be counterbalanced to avoid an overreaction. First, we expect the continued absence of an explicit balance of risks to inflation, with the recovery in underlying inflation remaining “unclear” and wages “subdued”. Second, Draghi could say that the sustainable correction in inflation will be assessed over the rest of this year, indicating commitment to continuing QE until year-end; this would not preclude tapering from being pre-announced before year-end. Third, we expect a reinforcement of the ECB commitment to doing whatever is required within its mandate to reach its inflation goal, including reversing course on policy if necessary. The ECB has committed to re-accelerating QE if necessary. With the final TLTRO2 auction coming up this month, we believe the ECB will add that it is prepared to re-introduce TLTRO2 auctions if necessary too.
The chart below highlights the history of the ECB's last 6 inflation projections compared to the actual, suggesting that the central bank finds itself modestly behind the (commodity) curve at this moment.
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