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19 Feb 2016
EUR: ECB Accounts signal intent but markets sceptical - MUFG
Derek Halpenny, European Head of GMR at MUFG, suggests that the EUR/USD rate fell to an intra-day low of 1.1071 yesterday in part on the back of the release of the accounts (minutes) of the monetary policy meeting on 22nd January.
Key Quotes
“There was “unanimous” agreement that the current monetary stance “needed to be reviewed and possibly reconsidered” given the financial market turmoil and the resulting tightening of financial market conditions. There were two aspects to the minutes worth mentioning. Firstly, there was a discussion on the merits of acting pre-emptively in order to not be perceived as only acting in response to market developments.
This was mentioned in the context of a sustained miss in reaching the inflation target and that becoming ingrained in future wage deals. Again, low crude oil prices do not help and ultimately the ECB wishes to see a break in the correlation between falling oil prices and falling inflation expectations. More aggressive action may be required for that to happen.
Secondly, and in a sense part of above, there was also a view expressed that given the long period of inflation being below target, there was a justification for accepting an inflation overshoot for a period – hence, we think the implication here is that the risk/reward for acting aggressively was attractive. We are not sure the German contingent would see it that way but nonetheless the fact that this view now holds within the Governing Council of the ECB does raise the prospect of the ECB becoming more aggressive the longer inflation remains well below target.
As stated here earlier this week, the Bundesbank has slashed its inflation forecast for 2016 and the current ECB projection of 1.0% will also be slashed when announced at the meeting on 10th March. The ECB believes the policy stance needs to be reinforced and we certainly expect that. A EUR 10bn increase in the monthly rate of QE to EUR 70bn; a 6mth time extension to Sept 2017; and a 10bp cut in the deposit rate to -0.40% are the measures we expect.
The problem for the ECB is that this mix of policy measures may not alter financial market conditions dramatically. A 10bp cut in the deposit rate is fully priced and if risk averse financial market conditions continue, it will be difficult to push the euro considerably lower. That of course won’t deter the ECB from acting but we continue to believe that until the FOMC comes back into play later in the year, the scope for a notable drop in EUR/USD is limited.”
Key Quotes
“There was “unanimous” agreement that the current monetary stance “needed to be reviewed and possibly reconsidered” given the financial market turmoil and the resulting tightening of financial market conditions. There were two aspects to the minutes worth mentioning. Firstly, there was a discussion on the merits of acting pre-emptively in order to not be perceived as only acting in response to market developments.
This was mentioned in the context of a sustained miss in reaching the inflation target and that becoming ingrained in future wage deals. Again, low crude oil prices do not help and ultimately the ECB wishes to see a break in the correlation between falling oil prices and falling inflation expectations. More aggressive action may be required for that to happen.
Secondly, and in a sense part of above, there was also a view expressed that given the long period of inflation being below target, there was a justification for accepting an inflation overshoot for a period – hence, we think the implication here is that the risk/reward for acting aggressively was attractive. We are not sure the German contingent would see it that way but nonetheless the fact that this view now holds within the Governing Council of the ECB does raise the prospect of the ECB becoming more aggressive the longer inflation remains well below target.
As stated here earlier this week, the Bundesbank has slashed its inflation forecast for 2016 and the current ECB projection of 1.0% will also be slashed when announced at the meeting on 10th March. The ECB believes the policy stance needs to be reinforced and we certainly expect that. A EUR 10bn increase in the monthly rate of QE to EUR 70bn; a 6mth time extension to Sept 2017; and a 10bp cut in the deposit rate to -0.40% are the measures we expect.
The problem for the ECB is that this mix of policy measures may not alter financial market conditions dramatically. A 10bp cut in the deposit rate is fully priced and if risk averse financial market conditions continue, it will be difficult to push the euro considerably lower. That of course won’t deter the ECB from acting but we continue to believe that until the FOMC comes back into play later in the year, the scope for a notable drop in EUR/USD is limited.”