State Street Comments on European Central Bank Committee Meeting

In reaction to today’s European Central Bank meeting (ECB) meeting, Michael Metcalfe, global head macro strategy at State Street Global Markets; Sophia Ferguson, senior portfolio manager at State Street Global Advisors; and Antoine Lesné, head of EMEA strategy and research for SPDR ETFs, offer their views.

Metcalfe commented, “In theory, this year was to herald the start of the ECB policy normalisation process. That may still turn out to be the case, but near-term downside risks are growing. Our online inflation series, PriceStats*, suggests headline inflation is set to fall rapidly in the Eurozone in Q1. In response, the ECB’s first policy step may need to allay fears of a sharp contraction in its balance sheet in the next two years by offering another targeted longer-term refinancing operation (TLTRO). Once again European market pessimism could be rescued by acronym along with generous liquidity for the banking system.”

Ferguson commented, “With both growth and inflation data moderating, the ECB’s comments have done little to assuage the market that the window for rate hikes has not passed them by. While downside risks appear to have grown over the last few months, the slowdown in Eurozone growth is likely to moderate toward trend, rather than hit recessionary levels. Although policy normalization is underway, a rate hiking cycle that materially alters the policy stance appears to be out of reach given economic conditions.”

Lesné commented, “While the medium term outlook of slightly above potential may still be flagged as valid, the short-term downside risks, from Brexit to financial market volatility, were topics of discussion.

“For now, the ECB does not appear in a rush to alter its course, but the window of opportunity to normalise policy may be closing rapidly. Other tools remain at the disposal of the ECB to help return to higher levels of core inflation which is stuck around the 0.9 – one percent range. We expect the euro to weaken a little further and for core sovereign yields to remain around their recent low range before we see more positive news on other global fronts.”