MNI STATE OF PLAY: ECB Ups GDP Forecasts, Keeps Dovish Bias

By Christian Vits

     FRANKFURT (MNI) - While the European Central Bank staff economists raised

its projections on both GDP growth and inflation, ECB President Mario Draghi

maintained his soft and dovish wording on the future monetary policy path.

     "Compared with the September 2017 ECB staff macroeconomic projections, the

outlook for real GDP growth has been revised up substantially," Draghi said at

Thursday's post-policy meeting press conference. "At the same time, domestic

price pressures remain muted overall and have yet to show convincing signs of a

sustained upward trend," Draghi added.

     ECB staff now expect inflation to rise to 1.4% next year, 0.2 percentage

points higher than forecast in September, but remaining far below the price

stability mandate of "below but close to 2%". However, the figure for core

inflation was revised lower to 1.1%.

     Economic growth is seen at 2.3% in 2018, a marked upward revision of 0.5

percentage points. Despite the revision, Draghi noted risks surrounding the euro

area growth outlook remain "broadly balanced".

     --MAJORITY 'OPEN-ENDED'

     From the viewpoint of the more hawkish Council members the robust recovery,

with 17 consecutive quarters of economic growth, will suggest bringing further

expansion of the central bank's balance sheet to an end.

     By contrast, Draghi stressed that "the vast majority wants to keep the

open-ended feature."

     As expected, the main interest rates were kept on hold and Draghi restated

that in January, the ECB will halve the current monthly amount of asset

purchases to E30 billion, with purchases announced until the end of September

2018 "or beyond, if necessary," Draghi said.

     As in the past, the Eurosystem will reinvest the principal payments from

maturing securities purchased under the APP for an extended period of time after

the end of its net asset purchases, and "in any case for as long as necessary."

     --FORECASTS FOR 2020

     The ECB published projections on growth and inflation for the year 2020 for

the first time, with forecasts pegged at 1.7% for both figures.

     Asked whether this figure would be sufficiently close to the banks

inflation target, Draghi said "the issue is how strong the path" towards 2% is.

"The news on inflation remains muted," he noted with regard to the current

juncture and argued that therefore an "ample degree of monetary stimulus" is

needed.

     "We can safely say that deflation risks have disappeared. We can also

safely say that the likelihood of low inflation rates of 0.5, 0.6%" has

diminished. "But we cannot go beyond that," Draghi said.

     Joerg Kraemer, Chief Economist at Commerzbank in Frankfurt, commented that

for the next two or three years central banks can't influence inflation much as

globalisation is the main driver. "But instead of acknowledging this the ECB

fights the inevitable low inflation," he said.

     "Presumably, the ECB chains its monetary policy to low inflation as the

Governing Council is dominated by highly-indebted Southern European countries,

which have a vital interest in continued low rates," he said.

     At the end, it was also striking that Draghi used the term "that was not

discussed" possibly more often than any previous meeting. The ECB apparently is

already in Christmas mode.

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

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