State Street Comments on European Central Bank Monetary Policy Decision

In reaction to today’s European Central Bank (ECB) Monetary Policy Committee (MPC) meeting, Michael Metcalfe, global head of macro strategy at State Street Global Markets; and Antoine Lesné, head of EMEA strategy and research for SPDR ETFs, offer their views.

Metcalfe comments, “It is ironic that Quantitative Easing (QE) will end this month, despite the backdrop of mounting pressure on European governments to expand their fiscal deficits. However, it is no coincidence, as the end of QE is the ECB’s first-step in a long and gentle path to removing policy stimulus.

“And while European labour markets have tightened and wage growth is showing tentative signs of returning, growth, as reflected in the ECB’s own forecasts, remains tepid. This means that the monetary tightening cycle will be glacial and pressures of fiscal policy will only grow in the coming year. This in turn will keep the market focused on the details of ECB’s reinvestment policy for what little official support will remain for sovereign bond markets going forward.”

Lesné comments, “As expected, the end of net asset purchases was confirmed and is a first step in a gradual normalisation of monetary policy. However, while recent economic numbers like the Industrial Production Index were less alarming than previous economic data, there is a loss of economic momentum at play in the Eurozone, which was acknowledged by President Draghi last week. This backdrop means that rate normalisation will be slow, gradual and dependent on growth pick up.

“Market focus has now started to shift towards the ECB’s reinvestment policy and the potential to use other accommodative measures, should there be a need to support the economy and inflation targets. Given where core bond yields are currently trading, there will be little support at such low levels in the New Year, leading us to favour shorter duration exposures to mitigate some of the interest rate sensitivity in portfolios.”