Equity markets in Europe fell sharply on Thursday. It was even the worst trading day of the year, with declines of the major indices from 1.7 to over 2 percent. The reason: investors are afraid of an economic slowdown and overvaluations. At the same time, analysts dived into the European Central Bank (ECB) minutes, which they found “extremely vague”.
These minutes show that the ECB is sticking to its 2 percent inflation target. More important, however, was the fact that the ECB has yet to issue a range. According to Rabobank, this indicates that a symmetrical inflation target was chosen instead of an average target. According to analysts, this means that the ECB should be acting equally hard against both negative and positive deviations.
Monex Europe currency analyst Ima Sammani said the ECB statement could be seen as ‘dovish’ by markets in the short term, as the new inflation target gives the central bank plenty of room to maintain an accommodative policy stance for longer.
ECB President Christine Lagarde said at the press conference: the inflation target of “below but close to 2 percent” is giving way to a “symmetric target of 2 percent in the medium term”.
The (likely) systematic easing of monetary policy is keeping minds busy. ING analysts are taking into account the real possibility of a temporary overshoot in inflation in the short term. They take this from Lagarde’s comment that “this could also imply a transitional period in which inflation is moderately above target”.
OHV
Chief economist Edin Mujagic of asset manager OHV writes in an analysis that “the bank has now decided that the so-called unconventional instruments, such as the purchase of government and corporate bonds and special loans for banks ((T)LTROs) will be part of the standard equipment of the bank from now on. In other words, what was unconventional has become conventional. Additional instruments may be added over time.”
“A lot has changed. For instance, the door has now been formally opened for quantitative easing to be deployed as the ECB sees fit. The bank has made it easy on itself by being very vague about under what circumstances the use of that and other non-traditional instruments is justified.”
Aberdeen Standard Investments
“The 2 percent inflation target, the extremely vague language around inflation overshooting and the inclusion of housing in the inflation basket are marginal changes and were already widely expected,” Aberdeen Standard Investments wrote in a response.
The asset manager calls the focus on climate change where the central bank will aim for ‘green QE’ in the medium term.
Pimco
Pimco economist Konstantin Vei believes that monetary policy will not change much in the medium term. The announcement did not come as a bolt from the blue, he believes.
The question remains, according to Veit, with which monetary strategy the ECB will bring inflation to 2 percent. “The ECB’s response seems to be more of the same, which is also reflected in the fact that the ECB still relies on interest rates as the primary monetary policy tool.”