Global Daily – ECB may guide on number of hikes per year

by: Nick Kounis , Bill Diviney

ECB View: Dutch central banker gives more insight into options for forward guidance  – Klaas Knot, the hawkish Governor of the Dutch central bank, discussed the outlook for the ECB’s interest rate policy today. In an interview with the German newspaper Boersen-Zeitung, he said the ‘through the summer’ guidance on the period of unchanged policy rates was an expectation and that means ‘there are other possible outcomes around this central expectation, in both directions’. Perhaps unsurprisingly given his leanings, he thought that this may mean sooner rather than later. Mr Knot asserted that ‘if our baseline scenario is confirmed in the next few months, we might think again about the pace of our normalization and might not have to wait that long’. Indeed, he also played down the recent ‘disappointing’ outturn for core inflation, saying that there were still ‘fundamentally’ good reasons to expect core inflation to accelerate. He then went on to discuss options for a further enhancement of the ECB’s forward guidance, to elaborate not only on the timing of the first rate hike, but also on the pace of normalisation after that. One of the options he floated was communicating how many times a year the ECB would need to hike the policy rate. Here too he seemed to tilt to the hawkish side, suggesting the central bank could have reason to get interest rates out of negative territory ‘as soon as possible’.

Other ECB officials – such as Benoit Coeure and Peter Praet – have also discussed forward guidance. However, Mr Coeure, a centrist, seemed to signal – by pointing at forecasts from sophisticated Taylor Rules – that interest rates would go up at an exceedingly slow pace. A lot will depend on the path of core inflation as well as the identities of the next ECB President and Chief Economist, as the terms of Mario Draghi and Peter Praet end next year. Our own view is that core inflation will recover slowly, while centrists rather than hawks will take the helm of the Executive Board. As for forward guidance, giving guidance on the pace of hikes – rather than precise timing – conditioned on the outlook, could be a good way to avoid unnecessary volatility. (Nick Kounis)

Fed View: Some doves are for turning… but not Bullard – St Louis Fed President Bullard continued to strike a relatively dovish tone in remarks made today. While acknowledging the present strength in the US economy, he repeated his view that ‘we are close to neutral’ and that ‘we don’t have to be projecting planned rate hikes at this point’, but preferred instead a more data-dependent approach from here on. With that said, he sounded comforted by the recent re-steepening in the yield curve, saying ‘that’s probably welcome from my perspective’ and that a healthy level would be closer to 70bp (as of Friday’s market close, the 2s10s are c.34bp). These comments come in contrast to those of Atlanta Fed president Bostic – a more moderate dove – who last Friday signalled a more meaningful shift in his policy views. Most strikingly, he said ‘the central question in my mind is whether the apparent strength in GDP and job growth is a signal that I have materially underestimated the underlying momentum of aggregate demand,’ and that if that were the case, ‘the potential for overheating would require a higher path for rates than what I had been thinking’. Indeed, earlier in the year, Bostic – who is a voter on the FOMC this year, but not next – said he expected 2-3 rate hikes in 2018. By December, he is very likely to be voting in favour of a fourth. (Bill Diviney)