ECB likely to keep policy very loose for a long time, says ANZ Research

The European Central Bank (ECB), is of the view that a very substantial degree of monetary accommodation is still needed, especially as it estimates that a third of the recovery in inflation between 2016 and 2018 is a function of their extraordinary measures. There is no evidence yet that inflation is returning durably to target or that it will return to target in a self-sustaining manner.

The backdrop to the euro area economy is continuing to improve. In Q1, real GDP rose by 1.9 percent y/y, which was the 16th consecutive quarter of growth. Of encouragement is the fact that gross value added by industry is showing a broadening in activity across sectors.

For the ECB, this is welcome as it confirms that deflationary risks in the euro area are abating. That, coupled with the more settled economic backdrop internationally, was behind the ECB’s decision to upgrade its forward guidance recently. It no longer sees the need for potentially lower interest rates. However, the ECB remains a long way off tightening monetary policy in our opinion, and it will want to let growth run strongly for the foreseeable future in order to help close the output gap.

That anticipated policy backdrop should provide for accommodative financial conditions going forward, which will be supportive of ongoing growth. Targeting a reduction in the output gap is an important element of the ECB’s policy settings as it will help to erode excess capacity and put some upward pressure on underlying inflation, which is what the ECB is committed to.

"We anticipate that exceptionally easy monetary conditions will remain in place for a long time," ANZ Research commented in its latest report.