MNI STATE OF PLAY: ECB Drops Easing Bias, Keeps Dovish Stance

By Christian Vits

     FRANKFURT (MNI) - The European Central Bank Thursday dropped the easing

bias from its monetary policy statement, but President Mario Draghi tried to

water down the magnitude of the wording change.

     "Fundamentally, it was a backward-looking measure," Draghi said at the

press conference following the ECB's monetary policy meeting. "Incoming

information, including our new staff projections, confirms the strong and

broad-based growth momentum in the euro area economy, which is projected to

expand in the near term at a somewhat faster pace than previously expected," he

added.

     The ECB dropped the pledge to increase the asset purchase programme (APP)

in terms of size and/or duration if the outlook becomes less favourable. The

risks surrounding the euro area growth outlook are assessed as "broadly

balanced", the President added.

     "On the one hand, the prevailing positive cyclical momentum could lead to

stronger growth in the near term," Draghi said. "On the other hand, downside

risks continue to relate primarily to global factors, including rising

protectionism and developments in foreign exchange and other financial markets."

     ECB staff now expect inflation to rise 1.4% this year, the same rate as

forecast in December, remaining far below the price stability mandate of "below

but close to 2%". In 2019, inflation is again seen at 1.4%, down from a forecast

of 1.5% in December and in 2020, the central bank forecasts inflation at 1.7%.

     "Measures of underlying inflation remain subdued and have yet to show

convincing signs of a sustained upward trend," Draghi stressed.

     Economic growth is seen at 2.4% in 2018, a slight upward revision of 0.1

percentage points from the December projection. The expansion will slow to 1.9%

in 2019 and to 1.7% a year later, according to the ECB.

     Draghi repeatedly noted concern over the recent debate about protectionist

measures. "If we will have retaliation, we will have an effect on confidence,"

he noted.

     U.S. President Donald Trump announced tariffs on steel and aluminium and

threatened to impose them on European automobiles as well. Such measures could

weigh on the growth outlook of export-led European economies, particularly

Germany, the Eurozone's growth engine.

     The ECB President also struck a cautious tone with regard of the euro's

exchange rate. It has gained 4.9% against the dollar over the past three months.

     "The Governing Council will continue to monitor developments in the

exchange rate and financial conditions with regard to their possible

implications for the inflation outlook," Draghi said. "Overall, an ample degree

of monetary stimulus remains necessary for underlying inflation pressures to

continue to build up and support headline inflation developments over the medium

term."

     Against the background of a growing divide within the ECB, "today's

communication change should, in our view, be seen as a conciliatory move to

please both the ECB's hawks and doves," ING's Chief Econoist for Germany and

Austria, Carsten Brzeski, commented. "Dropping the easing bias was probably like

doves feeding the hawks some breadcrumbs."

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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