State Street Comments on European Central Bank Monetary Policy Decision

In reaction to today’s European Central Bank (ECB) Monetary Policy Committee (MPC) meeting, Timothy Graf, head of macro strategy for EMEA at State Street Global Markets; Brendan Lardner, active fixed income portfolio manager at State Street Global Advisors; and Antoine Lesné, head of EMEA strategy and research for SPDR ETFs offer their views.

Graf comments, “A very consensus result from today’s ECB meeting. Above-trend eurozone growth and continuing improvements in the domestic labour market brought the end to its easing bias. However, any shifts in language to ending its asset purchase programme will have to wait, thanks to the currently benign inflation conditions throughout the eurozone and the recent strength of the euro. Our own online inflation measure, PriceStats shows inflation well away from target and actually slowing in recent weeks; suggesting the ECB need not hurry down the road of policy normalisation.”

Lardner comments, “Recent economic strength has been sufficient to allow the ECB to drop its pledge to increase the size and duration of QE if required. While their near term growth forecast was revised up, there was a minor downward revision to the inflation forecast. The ECB is growing in confidence that above-trend growth will continue, but not sufficiently enough to flag a major change in their forward guidance on the ending of asset purchases and the timing of its first rate hike. A degree of caution remains, with the ECB awaiting stronger signs of firming inflation pressure before signalling further moves toward policy normalisation.”

Lesné comments, “This was not going to be the most exciting meeting, but the slight tweaks to the language around asset purchases were clearly anticipated. The overall low inflation backdrop still advocates for a prudent and patient approach, while the team forecasts are being revised up slightly. The recognition that downside risks are receding should mean normalisation is gradually on its way. Meanwhile the ECB may still be trying to stem off a too rapid appreciation of the euro, which makes the inflation target more challenging. This outcome is expected to be neutral for euro sovereign bonds with a slight chance for an upside move in yields.”