🦁ING:
Today’s decision to stick to the front-loading of asset purchases in our view implies that there will either be significant tapering in the fourth quarter of the year or that the envelope could be increased, pushing an end of the Pandemic Purchase Programme (PEPP) beyond March 2022.
What does all of this old wine in new bottles really mean? In our view, it means that the new strategy indeed marks a shift towards more dovishness, potentially leading to a delayed and very soft tapering as well as a further delay of any rate hike. Not a real surprise but a confirmation that the hawks at the ECB are currently having a hard time.
In any case, as long as the ECB sticks to this benign inflation view the only really important change that the ECB delivered today was that any change (to monetary policy) will come later than expected. Even in new but scratched bottles, the wine is still the same: low for even longer and QE for almost ever
🗝UBS:
The ECB's new forward guidance is proving difficult to translate. It's the clear outcome of 'decision by committee'. Under what conditions will the ECB raise rates? First, the ECB staff economists need to project inflation will be 2% at the end of the second of the three year horizon period, and also that it will remain there for the third year. Second, the ECB will wait until it can assess whether the actual, realised components of inflation support the forecast. Third, it isn't a mechanical decision - the committee still gets to argue out the policy decision.
The doves on the Governing Council got the cross-check mechanism; the hawks got the emphasis on staff forecasts. Lagarde got the ability to arbitrate. Ultimately, it remains, as ever, a complex negotiation between factions on the Governing Council which they've attempted to drive into a model.
The ECB's new guidance represents the conditions that must be met for rates to raise. The last time the ECB came close to meeting those conditions was 2005. Supportive for equity; neutral for now on euro; undermines short end rates.
🦘Westpac:
What we did receive in the initial statement was a change in formatting as ECB attempted to provide greater clarity by providing policy subsections as well as reiterating their new symmetrical 2% inflation target.
The lead section within the statement highlighted their unchanged key lending and deposit rates remaining unchanged, followed by repeating the profiles for current APP and PEPP and ended on the TLTRO’s.
Within Q&A, Lagarde made it clear that there had been no discussions relating to altering APP, PEPP or TLTRO’s. Lagarde also emphasised that changes within the updated projections for the economy in September would be needed to support any changes in policy. She then backtracked slightly in stating that those projections need to be awaited before suggesting any potential shifts in policy. Market moves were indicative of a nervous market that was mildly biased towards a dovish surprise but was relatively relieved that there was little to have to respond to.
🔵Danske:
The euro area recovery was seen on track, as vaccinations have accelerated and lockdown restrictions been eased. However, the pandemic also continues to cast a shadow, especially related to uncertainty from the spreading of the delta variant for service sector activity. Employment is still some 3.3mio below pre-crisis levels and many people remain on job retention schemes. Overall, risks to the economic outlook remain broadly balanced. This is important in our view, as a PEPP extension would likely require downside risks coming to the fore again.
As expected, the ECB meeting was a non-event for FX markets. The EUR initially found its clue from relative EUR fixed income performance but during the press conference the single currency stabilised at close to unchanged levels for the day. Looking ahead, we strategically favour more EUR/USD downside but emphasise that this is much more a play on USD real rates, global inflation exposure and global cross asset moves than it is a play on ECB monetary policy.
Regarding bond markets, we saw a small amount of volatility during the press conference, with 10y German Bund touching -42bp, but ended virtually unchanged around -40bp, the level also heading into the 13:45 decision. The front of the curve is set to remain anchored for a long time and the front end is now also subject to significant directional risk. Furthermore, this leaves the 10y leg as the determining factor for curve slopes
💡Nordea:
The ECB stopped short of committing to keep rates low amidst higher inflation pressures, and left itself plenty of discretion – as a result the new guidance may not change the ECB outlook all that much.
We expect the ECB to scale down its bond purchases in the autumn, and also see renewed upward pressure on bond yields after the summer.Financial markets are not pricing in any near-term rate hikes or inflation hitting the ECB’s target.
The new statement also referred to ECB interest rates having been close to their lower bound for some time, further suggesting the ECB is not actively thinking about cutting rates further.
While yields could still fall a bit further in the near term, we see upward pressure re-emerging in the autumn, when the focus shifts towards a likely fall in ECB bond purchases, persistent inflation pressures in the US and continued economic recovery. EUR/USD initially fell but then started climbing, only to reverse course again. We continue to look for a lower EUR/USD, as the Fed will anyway outpace the ECB in its removal of extraordinary accommodation.
If one combines current market pricing on future Euro-area inflation with the ECB’s new guidance, the ECB would not be hiking rates at least in the next 15 years.
Comments