I participated in several one-on-one meetings with advisors to the European Central Bank’s (ECB) Governing Council (GC) and attended the "ECB and Its Watchers" conference where keynote speaker, ECB President Mario Draghi, provided insight on the future of monetary policy in the euro area.
The ECB is shifting policy to safeguard the path of inflation toward their medium-term goal of below, but close to, 2%. According to Mr. Draghi, convergence of inflation toward this goal has become increasingly uncertain as cost pressures remain nascent at best and financial conditions tighten due to external factors.
Moving forward, the ECB will place added emphasis on backward-looking labor market data. Further, the GC will recalibrate forward guidance to the path of short rates in order to strengthen legacy guidance on the timing of its first rate hike, or the "well past" qualifier.
Our view remains that unit labor cost growth will meet or exceed the ECB’s projections in 2019. Therefore, we find support for a steeper policy rate path into next year. Near term, however, the ECB has set market expectations for a dovish stance in 2018.