By Marta Vilar – MADRID (Econostream) – Econostream’s ECB Tone Meter showed the Governing Council turning marginally dovish this week, while the Executive Board was little changed and remained mildly hawkish.
The Governing Council reading slipped to –0.08 from 0.00 last week. The Executive Board edged down to +0.04 from +0.05. Comments tended dovishly as some Governing Council members pointed to rising risks of an inflation undershoot.
Biggest Movers of the Week: Villeroy and Rehn, While Hawks Remain on the Sidelines
After the ECB’s quiet period ended with the press conference, nine Governing Council members — including ECB President Christine Lagarde — made public comments before the end of the week on Friday. Of these, only Lagarde and Central Bank of Ireland Governor Gabriel Makhlouf tilted slightly to the hawkish side. Three members were scored as neutral, while four leaned dovishly, with two of the latter having the largest impact on the index.
Those were Banque de France Governor François Villeroy de Galhau and Bank of Finland Governor Olli Rehn. Both are among the most dovish members of the Governing Council to date. While their individual influence factors are not among the very highest in our ECB Tone Meter, shifts in their tone — in this case toward greater dovishness — can still materially affect the index.
Rehn’s tone showed the larger shift between the two. In remarks on Friday, he went further than in previous comments that had confirmed increased Chinese exports to Europe but drawn no conclusion for inflation.
This time, he said the January flash CPI of 1.7% — which most of his colleagues downplayed as being in line with expectations — was “a small sign” of a “real risk of lower-than-expected inflation.”
Villeroy also characterized inflation risks dovishly. Whereas he had previously said downside risks were “at least as high” as upside risks, he now described them as “probably more significant” than upside risks.
Dominant Themes in this Week’s Communication: Exchange Rate and Chinese Exports
As in the previous week, the exchange rate was one of the main topics, with most Governing Council members echoing Lagarde’s efforts to play down any impact.
Bank of Greece Governor Yannis Stournaras described the recent move as not “dramatic” and, together with Austrian National Bank Governor Martin Kocher, agreed with Lagarde that it was already incorporated in the ECB’s projections. Latvijas Banka Governor Mārtiņš Kazāks said the exchange rate had recently moved within a relatively narrow corridor and that the effective exchange rate had been broadly flat.
Chinese exports were flagged as a downside risk to inflation by Rehn and Villeroy, who said they could have a “pretty strong disinflationary effect.” Eesti Pank Governor Madis Müller, typically hawkish, noted that Chinese exports to the euro area had risen by more than a third over the past two years and were helping to lower input costs.