State Street Market Commentary on European Central Bank Interest Rate Decision

In reaction to the European Central Bank (ECB) meeting today, Timothy Graf, head of macro strategy at State Street Global Markets, and Brendan Lardner, EMEA head of portfolio management in the Active Global Fixed Income team at State Street Global Advisors, offer their views.

Graf commented: “Even though political risks are fading and data releases remain strong, the ECB is still unwilling to veer too far off their present course. Low core inflation is clearly weighing in their minds, suggesting policymaker caution will dominate for at least a few more meetings. While the second half of the year might get more interesting if the better run of data continues and core inflation starts to trend higher, asset purchase levels and benchmark rates will likely hold for at least the next few meetings. With German yields having corrected higher following the French election result, bond bears are likely to be a bit disappointed with the ECB’s continued unwillingness to think about tighter policy.”

Lardner commented: “In line with market expectations, the ECB left interest rates and its asset purchase programme unchanged at the April monetary policy meeting. Over recent months, the ECB has been under increased scrutiny as it has grappled with a number of conflicting forces; strong economic growth, accelerating headline inflation and the spectre of populism which has loomed over this year’s Euro-area elections. Today, the governing council echoed the cautious stance that has been in place over much of the last year, signalling that the current stimulus package would stay in place until at least the end of the year given the lack of self-sustaining core inflation. A further underpinning to the April policy decision is the ongoing populist risk in France; Mario Draghi and the governing council are likely to remain in a policy holding-pattern until Emmanuel Macron and Marine Le Pen have concluded their duel for the French Presidency. Looking forward into the second half of the year, assuming we have negotiated the French election hurdle unscathed, we could see renewed market pricing for accelerated ECB policy normalisation, especially if domestic data continues to impress. Nonetheless, if future data acceleration is not accompanied by increasing inflation expectations and rising core inflation, the ECB could disappoint markets by continuing in a holding pattern.”