ECB View: Draghi says it is not time to think about exit – ECB President Mario Draghi appeared before the Dutch parliament earlier today. He largely stuck to the message he gave following the central bank’s April monetary policy press conference. As then, he was positive about the economic outlook, but judged that very accommodative monetary policy remained appropriate. He said that recent economic reports confirmed that the recovery ‘is becoming increasingly solid and that downside risks have further diminished’. However, he insisted that ‘the time hasn’t come yet’ to exit or think about exit. Our view is that it will take quite some time for underlying inflationary pressures to build. Indeed, a new ECB research report (published in its Economic Bulletin) suggested that there was still considerable slack in the labour market, which could explain why wages were so weak. However, we think the ECB will still gradually move towards the exit, given the limits of the QE programme. In particular, the ECB’s holding of bonds of many countries will not be far off the 33% issue(r) limit by the end of this year. We think that in June, the ECB will confirm that growth risks are now balanced and no longer to the downside. We also think this will open up the way for it to make the forward guidance more neutral next month. This means it will drop the explicit possibility of cutting rates or stepping up QE. We then expect the ECB to set out its plan for tapering in September of this year. We think the ECB will start to reduce the pace of its monthly asset purchases (from EUR 60bn per month currently) in January of next year, in steps of EUR 10bn a month. That would lead to an end of the QE programme by June 2018. (Nick Kounis)170510-Global-Daily.pdf (59 KB)
Fed view: Some mixed messages from FOMC speakers – In the past couple of days we have had several Fed policymakers signalling their views on monetary policy. This comes shortly after the release of the May FOMC statement, which suggested that the Fed will continue to hike rates this year, despite the weaker Q1 data. However, the week started with a more cautious tone from St. Louis Federal Reserve Bank President James Bullard, who signalled that raising rates despite the weak Q1 data could suggest that the Fed is “…back into calendar based policy…” and paying less attention to data developments. His view, which contrasts to that of other FOMC members, is that there is no strong reason to change the policy rate soon. Meanwhile, the President from the Federal Bank of Cleveland, Loretta Mester, reinforced expectations of a rate hike in June. She mentioned that “in this environment where we to continue to make progress towards our goals, we need to move interest rates up, because if you don’t, you will be behind, and the outcome of that is never good”. Her argument is that the Fed can’t overreact to transitory movements in the data. Finally, Boston Fed President Rosengren and Kansas City President Esther George, two of the more hawkish members, continue to favour further rate hikes this year, despite the weaker Q1 data. They also favour reducing the Fed’s balance sheet this year. The Fed’s next meeting will take place 13-14 June. According to the Federal funds futures rate, a rate hike in June is now fully priced in. We expect a rate hike in June and another one in September. (Maritza Cabezas)
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