ECB Review - SEPTEMBER 2020: Markets Were Arguably Expecting A Little More

• The September ECB monetary policy meeting played out largely as expected with no changes to monetary policy, a restatement of the ECB's intention to monitor the exchange rate but not target it, minimal changes to staff macroeconomic forecasts and no more than an acknowledgement of the Fed's recent adoption of average inflation targeting.
• Nonetheless, markets were arguably expecting a little more. The ECB was not expected to adjust monetary policy to counter recent euro strength, but in the end the degree of verbal intervention felt a little soft and appeared to mirror Philip Lane's recent dismissal of the rally as little more than a 'repricing'. Despite indicating the likelihood of inflation staying in negative territory in the short term, President Lagarde warned against extrapolating from individual data points and gave no indication that additional easing was in the pipeline. Finally, although the forecast adjustments may have been modest and indicate that the baseline scenario remains in play, they nonetheless reflect a slight scaling back of the more downbeat assessment in June.
• Overall, the press conference suggested that while there remains heightened economic uncertainty and risks are tilted to the downside, the ECB does not feel a pressing urgency to do more at this stage. In other words, the GC decisions and communication feels slightly less dovish compared to the June meeting, while still pointing in the direction of sustained monetary accommodation. Expectations are higher for the December meeting when the ECB will have greater visibility on the strength of the economic recovery (and possible regional divergences) and staff macroeconomic projections will be updated alongside the new forecasts for 2023.

For the full publication, please see: MNI ECB Review September 2020