I participated to the ECB Watchers Conference in Frankfurt, on April 7th, and I gathered, there and in bilateral meetings I had around it, the following impressions:
1. The ECB feels that it has imparted a substantial dose of monetary stimulus into the economy and now it has to wait and see what the effects are before of thinking of doing more. The pause is to be measured in quarters more than months;
2. They have a reasonable expectation that they will get back in the vicinity of their price stability objective (lower but close to 2%) sometime around the end of 2017 or the beginning of 2018;
3. They are more confident, though, on the activity than on the inflation front, the current and prospective growth rate is not exciting but not too disappointing either given current estimates of the potential growth rate;
4. A significant jolt to current conditions, e.g. a significant exchange rate appreciation or a deterioration of inflation prospects, would be needed to move them away from their pause;
5. However, they will continue to say that, if it will be needed, they will do more to achieve their objective, thus communication will continue to stress their determination not to resign to too low a rate of inflation;
6. They will continue with this communication line and, if needed, follow-up with facts, notwithstanding the very negative public opinion in Germany, which is nearly unanimous in its visceral dislike of the ECB.
7. Consistently with their communication, they are hoping for the best but preparing for the worst, so preparatory work for additional measures is not being stopped, even if it needs not to be done at a hastened pace;
8. If they will need to do more this will be rather in the “purchasing” than in the interest rate area. The feeling I got is that they regard a further push down of interest rates as an extrema ratio. This is particularly the case after having considered and decided not to do any “tiering” of negative rates;
9. If they have to purchase more they are, as I have said already, very unlikely to do it with bank bonds (of either the senior and even more the junior variety). Then only equities are left, given that it is unthinkable that they would purchase foreign exchange, which would trigger a veritable currency war, while they seem to have reached the limit, both in terms of feasibility and effectiveness, on public and corporate bonds;
10. I continue not seeing any willingness to do my favourite move, namely interventions in the inflation derivative market.