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Livesquawk - With ECB Likely On Rate Hold, Focus Turns To Shifts In Inflation Target, Forward Guidance
With ECB Likely On Rate Hold, Focus Turns To Shifts In Inflation Target, Forward Guidance

- No moves expected for interest rates

- More details about new CPI target?

- Tapering talk unlikely

- Analysts await forward guidance adjustments

- Covid-19 cases on the rise

- Rate decision due Thursday at 11:45 GMT

- Press conference set for 12:30 GMT


By Eric Culp

European Editor, LiveSquawk News



21 July 2021 | 07:15 GMT




FRANKFURT – The meeting of Eurozone central bankers on Wednesday and Thursday is likely to be fractious as the hawks and doves square off over forward guidance after this month’s adjustment of the inflation target.


Following the lead of the US Federal Reserve, the European Central Bank raised its target for consumer price growth. For the Frankfurt-based bank, the increase was a product a strategic review, its first in 18 years. The ECB decided to lift its inflation goal to 2% from near but below that mark. A number of analysts say the policy change fell short of the shift at the bank's US counterpart, which announced in August of last year a willingness to permit inflation that exceeds 2% without raising interest rates.


The ECB suggested a readiness to adjust rates should inflation over- or undershoot the new goal by too large a margin. “This target is symmetric, meaning negative and positive deviations of inflation from the target are equally undesirable.”


ECB President Christine Lagarde is scheduled to face journalists following Thursday’s monetary policy decision – no rate changes are expected – and she will likely field questions on the increase in the inflation target and the other actions taken following the review, which the bank said included plans to add housing costs to its basket of consumer prices.


Forward guidance update possible

A solid bet is that the bank could change its policy roadmap as early as this week, according to analysts. Lagarde told Bloomberg Television earlier this month that following the adjustment of the inflation target, “Forward guidance will certainly be revisited.”


Analysts at Bank of America said a more dovish stance is likely. “We have a strong conviction that the revised forward guidance will have to indicate that accommodation will be more persistent than we thought with the old strategy. The alternative would be an acknowledgement that nothing has really changed.”


But whatever the bank serves up could be watered-down and intentionally obtuse, the analysts wrote. “The key question is how ambitious that forward guidance will be. A strong, clear, threshold-based forward guidance could solve both the problems of ‘intention’ and hence ‘credibility’. But we fail to see how, given the divide on this reflected in ECB ‘sources’ […], we can get strong enough forward guidance that leaves very little room for second-guessing and ties the hawks’ hands.”


Conversely, one can hear the optimism from BNP Paribas “Overall, we continue to push back strongly against the consensus notion that the shift in ECB policy strategy is modest or ineffective. In our view, the sea change in the European policy mix paves the way for a much brighter medium-term inflation outlook.”


BNP analysts said they expect the central bank to go big on Thursday, noting that comments from policymakers following the announcements of the changes in strategy “suggests that the ECB will go beyond just changing the forward guidance at its meeting on 22 July. Our bias is to think that we will get greater clarity on the post-PEPP (pandemic emergency purchase programme) environment as well, underscoring the ECB’s message of persistent accommodation.”


The central bankers can little afford to rock this boat right now. Preliminary data from manufacturing purchasing managers hit a record high in the Eurozone this month, according to IHS Markit, so the growth picture looks strong. Headline and core inflation in the euro area slipped in June, as expected, but more price growth is likely, according to analysts, so any hawk talk seems unlikely.


More importantly, links are still missing in the supply chain, a situation policymakers are loathe to exacerbate, and rising coronavirus cases in Europe and beyond strongly suggest continued monetary accommodation remains the path to be taken.