Comments on yesterday’s ECB meeting and global fixed income themes from the Global Bond Team ..
– The Bank of Japan (BoJ) and European Central Bank (ECB) both announced their monetary policy stances today.
– Via a majority vote of 7-2, the BoJ kept its monetary policy position unchanged, including its yield curve control approach and substantial asset purchase programme. As such, the policy balance rate remains at -0.1% and 10-year JGB yield target around 0%.
– As expected, the BoJ increased its growth forecast for the current fiscal year (to 1.8%) while reducing expectations for inflation. The central bank has also pushed back the expected timing of reaching its 2% inflation target to fiscal year 2019 (from 2018), which we perceive to be marginally dovish. Going forward, it will be important to observe the development of core CPI. We retain our long-end JGB curve steepening position.
– In a unanimous decision, the ECB also kept its monetary policy stance unchanged today, including maintaining the deposit rate at -0.4%, the main refinancing rate at 0.0%, the marginal lending facility at 0.25% and the size of its QE programme at €60 billion per month.
– ECB President Mario Draghi delivered a speech in Sintra at the end of June in which he referenced signs of a “strengthening and broadening recovery in the euro area” and that temporary factors weighing on inflation could be looked through, although “a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining”.
– Subsequently, ahead of yesterday’s announcement, market commentators were largely focussed on the potential for any hints about the further tapering of its asset purchase programme, as well as references to the recent strength of the euro and weakness in underlying inflation.
– We view yesterday’s messaging from the ECB as being dovish. Language in the prepared statement pertaining to QE was unchanged and Draghi noted during the press conference that any discussion on changes would take place in the autumn. When pressed when that is, he commented that timing was deliberately kept open.
– Regarding the euro, Draghi did not express a view, merely commenting that it had received “some attention”. He also noted that there are not any convincing signs of a rise in core inflation.
– Nevertheless, given the currency bloc’s improving fundamental backdrop and some recent impressive data releases, including industrial production and PMIs, not to mention the shortage of supply of bonds to buy, we believe that the ECB will fully taper its asset purchase programme by the end of 2018.
– We have a range of diversified positions across Europe. In fixed income these include short duration positions in the Czech Republic, Poland and France, with select exposure to securitised assets and corporates. In the currency space, we are long SEK and GBP.
– Elsewhere, the Bank of Canada raised interest rates by 0.25% on 12th July, the first change in two years. Meanwhile in Australia, the Reserve Bank kept monetary policy on hold but the minutes were also on the hawkish side with improved assessments of the labour market.