Chief economist update: European Central Bank policy U-turn

"The fact that the climate has become more uncertain doesn't mean one has to stay put - you do what you think is right ... In a dark room you move with tiny steps. You don't run, but you do move, said European Central Bank (ECB) president Mario Draghi.

About two months after the ECB ended QE - its €2.6 trillion asset purchase programme on 31 December 2018 - it's launched TLTRO III, for the same reasons the ECB chief listed - mainly slowing growth and inflation - following the conclusion of its 7 March 2019 Governing Council meeting.

Just as Financial Standard called for RBA rate cuts and the Fed's now at neutral ahead of the pact, we also anticipated the coming of a fresh LTRO ahead of the pack in November last year. My apologies for the plug, but employment dictates oblige me to do so.

Anyway, this is because, as it turned out, the growth slowdown observed over the past few months that Draghi reasoned was due to the "unusually strong growth" of the last four quarters of 2017.

This is 0.7% quarterly growth rate in all quarters, aided by the end of QE and before that, expectations of ECB exit and of course: "the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets."

So much so the ECB staff has once again lowered its GDP growth projections to 1.1% this year and 1.6% in 2020. This compares with the last forecast of 1.7% this year (lowered from 1.8%) and the next.

This is justifiable given the sharp slowing in GDP growth in recent months...

... and indications for continued slow going.

Similarly, HICP inflation's now seen to reach only 1.2% (from 1.8% previously) this year and 1.5% (from 1.6%) in 2020. HICP inflation stood at 1.5% in the year to February; core inflation at 1% - both below the ECB's 2% target.

Financial Standard has already warned about this  and even as far back as February 2018.

There must have been a big "U-turn" sign erected between the end of 2018 - when it was onwards and upwards on policy normalisation (for the Fed), policy exits (for the ECB and the BOJ) and "the next move in rates is up for the RBA - to a policy pause (Fed) and policy reversals and/or expected ones.

However, just as I turned Dr. Doom towards the second half of last year, the policy (easing/halt) responses from the world's major central banks (and fiscal authorities - China) have revived my optimism over the global growth outlook and with that, my sentiment for the financial markets.

Read more: European Central BankFinancial Standard
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