Global Daily – ECB minutes dismiss taper

by: Nick Kounis , Maritza Cabezas

ECB view: Minutes suggest tapering fears overdone – The account of the ECB’s Governing Council meeting of 7-8 September suggested that recent market fears about a tapering of QE are overdone. Governing Council members ‘noted that there was still no clear upward trend visible in measures of underlying inflation, which remained low’. This is a crucial statement, as the ECB’s forward guidance on QE (from the press statement) is that ‘it will continue until (we see) a sustained adjustment in the path of inflation consistent with its inflation aim’. So clearly this condition is not judged to have been met. In addition, the Governing Council judges that the projections of rising underlying inflation are contingent of ongoing stimulus. According to the account ‘the projected path of inflation was conditional on exceptionally supportive financing conditions, which to a large extent reflected the current accommodative monetary policy stance and prevailing market expectations about the future course of monetary policy’. The Governing Council therefore judged that it was ‘of crucial importance to preserve the very substantial degree of monetary support that was embedded in the staff projections’. (Nick Kounis)

Global-Daily-Insight-7-October-2016.pdf (161 KB)

ECB Outlook: subdued inflation points to QE extension and lower yields – The account also stressed the importance of rising wage growth pushing up service sector inflation in the ECB’s assessment that core inflation will rise in the coming period, given that goods prices would likely remain subdued. Data released since the meeting cast doubt on this view. For instance, a report published on 16 September showed eurozone labour cost growth slowing to 1% yoy in Q2 from 1.6% in Q1. With economic growth lacklustre, wages subdued, core import prices falling and inflation expectations dislodged, core inflation does not look like accelerating any time soon in our view. We therefore continue to think that the ECB will expand the duration of its QE programme from March 2017 currently to September 2017 in December. As it signalled in September, the ECB will also likely announce changes to its QE programme to increase the universe of eligible assets as it will not be able to meet even its current targets under the existing structure. The ECB will likely decide to start buying bonds that yield less than the deposit rate (so far restricted) as well as buying bonds below the 2y maturity. We maintain the view that Bund yields are likely to decline further. (Nick Kounis)

Fed view: Time is drawing near for a rate hike – The more hawkish Fed policymakers have been warning investors that the next rate hike could be as early as the next meeting in November. At the start of the week, the President of the Federal Reserve Bank of Cleveland, Loretta Mester, a voting member, mentioned that the economy was ripe for a rate hike. In the past few days, other regional Fed Presidents have supported this view, including Dennis Lockhart and Patrick Harker, who are non-voting members. However, Vice Chairman Stanley Fischer discussed low interest rates in the US on Wednesday, but did not mention the appropriate timing for the next rate hike. He suggested that ‘monetary and fiscal policy could ameliorate some, though not all, the potential causes of ultra-low rates’. He mentioned the importance of policies to boost productivity growth, which are more likely to be found in effective fiscal policy rather than in central bank actions. The bond market’s response to these comments is still cautious. The Federal funds futures implied probability of a rate hike in November is only 24% and slightly higher than 60% in December. We think that a November rate hike is unlikely given the proximity of US elections. However we do continue to expect a rate hike in December. (Maritza Cabezas)