Annalisa Piazza (MFS Investment) | The ECB maintained a ‘steady hand’ at today’s Governing Council meeting, keeping the ongoing policy accommodation unchanged. The decisions highlighted in the Introductory statement were unanimous although there was some debate concerning the nuances on the PEPP purchase pace. Overall, the dovish GC members have seemingly prevailed, again, in that it was agreed any talk of tapering would be detrimental for financing conditions, the ongoing recovery and inflation in the medium term. Market participants concerned about some possible tapering have now been reassured that the ECB considers any discussion about any possible change in PEPP as premature. The market reaction has been benign as the ECB doesn’t seem to be in a rush to reduce its policy accommodation. Spreads have compressed a touch more after the press conference. Core yields are slightly up but this is mainly on UST moving up due to strong US CPI.
Accommodative monetary policy is needed at the current juncture and well into the recovery as – despite some upward revision in growth and inflation in the next few quarters – inflation remains well below target in the medium term and tightening financing conditions would further undermine the possible convergence to 2%. Risks around growth are now balanced but the ECB continues to see a high degree of uncertainties that are unlikely to dissipate until a full normalization of the economy materializes.
PEPP will continue at a significantly higher pace than in early 2021 going into Q3, taking into account market conditions and seasonality (notably Q3 supply dries up in the summer). Flexibility in conducting PEPP purchases remain a key factor.
As for the other policy tools, the ECB maintained the same wording on its forward guidance and continued to stress the importance of maintaining ample liquidity via different channels (banking sector is crucial) as the recovery phase will be driven by reduced risks of long-term scarring from the pandemic. A smooth transition is needed to avoid that scarring further compromise the closure of the extremely ample slack in the economy.
As for inflation, the ECB continues to see the ongoing spike as a temporary matter, driven by energy, supply bottlenecks and temporary factors. Underlying inflation (especially in the services sector) is driven by wages and the latter are showing little signs of acceleration at the moment and no uptick is expected anytime soon.
All in all, the ECB meeting was a dovish exercise that helps to maintain current favorable financing conditions and avoids any wobble in a fragile recovery. Markets are expected to reflect the current accommodation which will continue for another few quarters, with some possible volatility closer to the September ECB meeting when the Strategy Review is likely to be announced. Until then, the ‘steady hand’ will allow markets to move in a narrow range. Risks of higher yields will continue to be more driven by US-led moves.