ECB's Hawkish Tweak

By the ECB´s decision to remove the explicit pledge to buy more assets if necessary the pledge to keep on buying assets on monthly basis remained. The change in the ECB statement is a hawkish tweak although the ECB President tried to downplay it during the press conference.

The fast is that the ECB Governing Council dropped the part of the forward guidance in its statement in which it says that it stands ready to increase the asset purchase programme in terms of size and/or duration.

That means that the asset purchasing that has been open ended in terms of size and timing is from now onward open only in terms of the size. And this is what is ultimately hawkish about the statement, regardless of Draghi remaining open to all possibilities, by the way, as all central bankers always are.

The EUR/USD has been reacting strongly on the upside rising some 70 pips to 1.2445 to the hawkish tweak. By the end of the ECB press conference, it fell back to 1.2370 levels as Draghi repeatedly pointed out that the hawkish tweak is not a hawkish tweak while the ECB still keeps all options open in its statement.

With the central bank as conservative as the ECB, that is judging not twice but, ten times before it changes a single word in its statement is such change radical, regardless of what Draghi says in the press conference. Especially given the circumstances of increased growth projections.

The ECB staff macroeconomic projections presented in March are optimistic on growth. The staff revised slightly higher growth this year to 2.4 percent from 2.3 percent, while keeping the 2019 and 2020 growth forecasts unchanged at 1.9 percent and 1.7 percent respectively. 

The ECB staff also made a minor change to its inflation forecasts, although to the downside.  This year's forecast was not changed at 1.4 percent, but next year's headline CPI was lowered to 1.4 percent from 1.5 percent.  The inflation projection for 2020 was left unchanged at 1.7 percent. 

The ECB's key message is that the asset purchases will continue at least until September with tapering in Q4 still appears to be likely scenario if inflation forecast remains muted for now.