Despite expectations that the ECB would only announce adjustments on QE and interest rate in June the earliest, the upcoming meeting is not a non-event. Since the March meeting, Eurozone’s economic data have surprised to the downside. It would be of great interest to see the policymakers’ interpretation of the situation. All in all, we expect the members to view the first quarter slowdown as driven by temporary factors, e. g.: weather, which do not affect the monetary stance.
Headline HICP inflation rose to +1.3% y/y in March, from +1.1% in February. However, the final reading had not only missed consensus but was also revised lower from the flash reading. Core inflation, as +1% y/y, was unchanged from the disappointing flash reading released earlier this month. The softer reading was partly a result of weaker-than-expected positive effect of Easter.
Economic activities in the bloc also slowed. The final composite PMI fell -1.9 points to 55.2 in March, following a -1.7 points drop in February. The April report showed that the flash reading stayed unchanged this month. As such, the composite PMI now stands at 55.2, compared with a cyclical peak of 58.8 in January.
According to Markit/ IHS, “the Eurozone economy remained stuck in a lower gear in April, with business activity expanding at a rate unchanged on March, which had in turn been the slowest since the start of 2017. Growth has downshifted markedly since the peak at the start of the year, but importantly still remains robust”.
Separately, industrial production contracted -0.8% m/m in February, after a revised -0.6% drop in January. The slowdown was partly due to the severe weather condition in the first few months of the year. With a negative IP reading likely recorded in the first quarter of the year, after a +1.4% jump in 4Q17, the 1Q18 GDP growth would likely have eased from the previous quarter.
We do not expect the slowdown in economic growth during the inter-meeting period would affect the monetary policy outlook. Indeed, the members would still see the risks to growth “remain broadly balanced”.
Over the past weeks, ECB officials have downplayed the significance of the recent slowdown in economic activities. Couré affirmed that he was “not worried about Eurozone growth” while Praet noted that “weaker data has no reason to change ECB’s assessment”, although he acknowledged “some moderation of late, following several quarters of very strong growth”. Villeroy also suggested that “recent growth data don’t alter inflation outlook”.
That said, we suspect the members might want to amend the language that “the strong cyclical momentum, underpinned by continued positive developments in sentiment indicators, could lead to further positive growth surprises in the near term”.
On the monetary policy outlook, there are two issues in focus: updates on the future path of QE beyond September 2018 and interest rate guidance after the end QE. We do not foresee any change in the language at the upcoming meeting. It is more likely for the members to make such announcements in June, accompanied by the latest set of economic projections. There are risks for the announcements to be postponed to July, though.