ECB Upgrades GDP Growth and Inflation Forecasts, Refrains from Talking about Taper

The ECB meeting contains little surprise. On economic developments, despite the notion that recent rise in inflation has been driven by temporary factors, the staff upgraded headline inflation projections sharply for this year and 2022. All monetary policy measures stay unchanged. Obviously, policymakers avoided to mention about “taper”, amidst concerns over tightening financial conditions. Acknowledging recent pickup in inflation, the members again attributed it to “base effects, transitory factors and an increase in energy prices”. They forecast that it would “rise further in the second half of the year, before declining as temporary factors fade out”. Yet, the staff made a sharp upgrade in the inflation forecasts for this year and next (more below).

Both GDP growth and inflation forecasts are revised for this year and 2022. Eurozone’s economy is projected to expand +4.6% y/y this year and +4.7% in 2002, compared with March’s estimates of +4% and +4.1% respectively. Inflation will accelerate to +1.9% this year before easing to +1.5% next year. In March, the staff projected that inflation would reach +1.5% this year and then slow to +1.2% in 2022. According to the central bank, the new projections “point to a gradual increase in underlying inflation pressures throughout the projection horizon, although the pressures remain subdued in the context of still significant economic slack that will only be absorbed gradually over the projection horizon. Headline inflation is expected to remain below our aim over the projection horizon”.

All monetary policy measures stay unchanged. As we had anticipated, the ECB reiterated the language that PEPP purchases “over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year”. The program would last until March 2022 and the ceiling remains at 1.85 trillion euro. The members affirmed that “the envelope can be recalibrated if required to maintain favorable financing conditions to help counter the negative pandemic shock to the path of inflation”. The members refrained from giving any hints about tapering amidst concerns tighter financial conditions. As president Christine Lagarde suggested, “a sustained rise in market rates could translate into a tightening of wider financing conditions that are relevant for the entire economy. Such a tightening would be premature and would pose a risk to the ongoing economic recovery and the outlook for inflation”.