The ECB keeps its options open about the exit of its expansionary monetary policy stance. There has been no significant change in ECB communication. The statement by President Draghi makes a very gradual tapering of its bond purchases in 2018 the most likely path. Many open questions about ECB monetary policy remain unanswered. It is still open when the ECB will end its bond purchases and when it will start raising interest rates.
The overreaction of financial markets to ECB communication in recent weeks shows that financial markets are too dependent on low interest rates and central bank liquidity.
A first rise in interest rates is unlikely to occur before 2019. The ECB is too far away from meeting its price stability mandate to allow an early exit. My main concern are the anchoring of inflation expectations at too low a level and the persistence of core inflation at around 1 percent.
Concerns about an overheating of the German economy are exaggerated and wrong. The high degree of underemployment and the low wage growth underline that the German economy still has a significant unused potential for raising production.
Growth in the euro area is encouraging although the euro area economy is still far below potential. Unemployment is still too high and risks in the banking sector are underestimated as the problems in Italy have shown in recent weeks.