Comments on today’s ECB meeting and global fixed income themes from the Global Unconstrained Bond team ….
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By Marilyn Watson Head of Global Fundamental Fixed Income Strategy
Today, the ECB maintained its current monetary policy stance, holding the deposit rate at -0.4%, the main refinancing rate at zero and the marginal lending facility at 0.25%. During the press conference, President Draghi noted that they did not discuss cutting rates further, an extension of QE or tapering during this monetary policy meeting.
Nevertheless, with HICP inflation still running well below the central bank’s target of close to but below 2%, we expect the ECB to retain an easing bias. We believe that any future loosening is likely to be via other tools, such as asset purchases, rather than significant changes to key policy rates and had been looking for any hint during the press conference from President Draghi of an extension to the asset purchase programme, which is due to end in March 2017. Instead, he re-emphasised the need for fiscal policy measures and the implementation of structural reforms.
The Bank of Japan (BoJ) announced changes to its monetary policy framework on 21st September that we had not expected, the most important being the introduction of “QQE with yield curve control”. The 10-year JGB yield level will now be targeted to remain around 0% and guidelines for the average remaining maturity of JGB purchases have been removed, while the negative -0.1% Policy Balance Rate was retained.
In addition, among several other changes, the BoJ communicated an intention to overshoot its 2% inflation target and removed the target date for achieving this. Overall, in our view this marks a shift away from an emphasis on negative rates towards anchoring the yield curve. Our positioning in JGBs is currently neutral.
This month both the Reserve Bank of Australia and the Bank of Canada left key policy interest rates unchanged at 1.5% and 0.5% respectively. We are currently positioned with a long-end Australian government bond curve flattener and are short the Canadian dollar versus the US dollar. We view any further cuts from either central bank as being data dependent, however, believe there is a possibility that both could reduce rates in 2017.
One of our highest conviction emerging market views, that we have retained for quite some time, is a positive view on India where we are long local currency bonds and have an active long position in the rupee. The Reserve Bank of India reduced the official repo rate by 0.25% at the start of October to 6.25%.
Finally, we are long Brazilian duration in the front-end part of the curve. The central bank cut the key overnight interest rate this week (19th October) by 0.25% down to 14%. With inflation easing, we believe this is the start of a new monetary policy easing cycle.