State Street Comments on ECB Monetary Policy Decision

In reaction to the European Central Bank (ECB) meeting today, Timothy Graf, head of macro strategy for EMEA at State Street Global Markets; Brendan Lardner, active fixed income portfolio manager at State Street Global Advisors; and Antoine Lesné, head of EMEA strategy and research for SPDR ETFs offer their views.

Graf comments, “ECB president Draghi has done enough to keep euro bulls happy in not pushing back too much against the recent strength in the single currency. So long as the rate of appreciation remains well contained, it seems like the central bank is willing to live with euro strength as a consequence of the success of its past easing efforts. Those thinking the euro has gone a bit too far too fast should also not be too disappointed. The message that the ECB will be slow to remove accommodation remains clear and the inclusion of language about the volatility of the euro acknowledges what has become an overwhelmingly consensus euro appreciation bias. Two inflation prints between now and the 8 March meeting will be widely watched for clues as to whether or not the removal of accommodation has any scope to accelerate.”

Lardner comments, “The ECB have given us few fresh clues about the ending of their asset purchase programme or the timing of the first rate hike today.  While the activity and survey data remains strong, underlying inflation trends remain subdued.  In this light, the ECB are more likely to signal a change in guidance to the market at the March meeting at which time a fresh set of staff economic forecasts will be available.   While Mr. Draghi did give focus to the ongoing volatility in the currency being a risk, it appears his comments today will not be sufficient to drive a meaningful reversal in recent strength.  Despite some questioning from certain sections of the Governing Council of the need for a continuation of asset purchases beyond the end of September, this was played down by the President and the market may have to wait a bit longer for the ECB to signal any change to their stated path.”

Lesné comments,“The ECB will want to see further dynamism in the economic expansion and a clear build up in inflation (underlying prices as well as wage inflation) before it follows suit on a more hawkish message and a change of path. For now the ECB is still buying bonds even if it’s less of it. The primary reaction has been through a strengthening of the currency even if Mario Draghi comments were carefully worded vis-à-vis the recent US signals and competitive devaluations.”