Multiple Factors Hint at Continued Status Quo from ECB



Even though the ECB’s monetary policy has been very accommodative, its plans for dialling it back have been quite conservative. We don’t expect this will change at the central bank’s next meeting. QE will eventually end and short-term rates will eventually rise – but not yet.

We expect the European Central Bank (ECB) to make no changes to its monetary policy or forward guidance at its next meeting, on 26 April.

We see several reasons for the status quo to be maintained. The latest economic figures and business surveys out of the European Union (EU) have been less optimistic than those released early in the year. In addition, the euro-zone’s headline inflation is moderate (up 1.4 per cent year-on-year in March) and core inflation has been holding at low levels (1 per cent in March for the third consecutive month). All told, these factors should reinforce the ECB’s conservative approach to the gradual normalization of its monetary policy.

In addition, there are growing concerns over the uncertainty wrought by the United States’ increasingly protectionist tendencies. Benoît Coeuré, a member of the ECB’s Executive Board, recently stressed the potentially negative impact of US protectionism on long-term global growth. This is yet another sign that the ECB is less likely to make changes at this juncture.

The ECB has, however, recently discussed when it could make changes to its policy. The March committee minutes showed that the ECB would use three criteria – convergence, confidence and resilience – to decide when to terminate its quantitative-easing (QE) programme:

  • Headline inflation that is converging towards the central bank’s medium-term target of 2 per cent.
  • Confidence that EU’s inflation trajectory is on track to reach this target.
  • The resilience of inflation following the end of QE.

While the ECB’s latest inflation forecast of 1.7 per cent by 2020 is consistent with its desired target, its ability to have confidence in inflation’s trajectory is no doubt the most problematic of these three criteria. The central bank’s forward guidance is therefore likely to focus on the third point: resilience.

No matter what, QE will inevitably come to an end. As a result, we expect the ECB will use its next few meetings to underline the positive impact of reinvesting the principal from its bond purchases. We also expect the central bank will emphasize its willingness to keep short-term rates at extremely low levels for an extended period of time. The markets seem to agree with our assessment, with no initial short-term rate hike priced in before the second half of 2019.

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Vindication for the Fed’s Plans for Gradual Normalization

Vindication for the Fed’s Plans for Gradual Normalization


The latest US economic data appear to support the Fed’s strategy and match the market’s expectations: no rate rises after the FOMC’s May meeting, but three or four hikes by the end of the year. Longer term, however, the market’s expectations don’t match what the Fed is likely to do, which could create turbulence.