As we suspected, both the European Central Bank (ECB) and Bank of England went out of their way overnight to emphasise that recent increases in interest rates and expectations of tighter monetary conditions is a US-centric phenomenon. Statements from both central banks were decidedly dovish. It was, however, all talk with no new action from either central bank.
For his part ECB
President Mario Draghi moved to forward guidance on rates, incorporating a continued
bias to ease, by stating the ECB will keep rates at the current or lower level
for an “extended period”. The move away
from the previous policy to “never pre-commit” was made necessary by the recent tightening in monetary conditions
reflected in higher Eurozone interest rates. At the press
conference he said the extended period would be determined by the medium-term
outlook for inflation, growth and credit conditions. Draghi again highlighted the potential for
lower interest rates, including the possibility of negative deposit interest
It remains the
case that while there has been relative calm in financial markets in Europe, it
is yet to translate into higher economic growth. Recent data, while better, is still best
described as being “less bad”. And the financial
calm itself remains fragile. Latest
political ructions in Portugal could lead to fresh elections and a backlash
against austerity. In Greece the troika
is meeting to discuss the next tranche of bailout funding at the same time the Greek
Government wants to access some of the funding allocated for bank
recapitalisations to meet its own financing gap, a result of the privatisation
program being behind schedule.
Privatisation was always going to be challenging, but it means Greece is
now behind in its bailout commitments.
In the UK this
was Mark Carney’s first MPC as Governor.
While recent data has been better, it came just after the release of
revisions to historical GDP data showing the UK economy has made less progress
than previously estimated at clawing its way back to pre-GFC levels. According to the Office of National
Statistics, UK GDP is now 3.9% below its pre-GFC level compared with 2.6%
previously. That will have reinforced
the dovish tone in today’s statement.
The Bank noted the recent rise in interest rates
and stated the rise in rates was inconsistent with what is happening in the UK
economy. “Since the May Inflation
Report, market interest rates have risen sharply internationally and asset
prices have been volatile”. And from later in the statement: “…in the
Committee’s view, the implied rise in the expected future path of Bank Rate was
not warranted by the recent developments in the domestic economy”.
statement was unambiguously dovish, there was no mention of specific
action. Mr Carney has only just taken
charge so it was probably too early for any significant action, the minutes of
the meeting, which will be released in a couple of weeks, may be more
illuminating with respect to market expectations of greater use of forward
guidance and/or a boost to the BoE’s asset purchase program. Indeed today’s statement, which was more fulsome
from what we would normally see from the BoE, specifically mentioned the latest
remit letter from the Chancellor of the Exchequer to the MPC asking the
Committee to provide an assessment in August of the case for adopting some form
of forward guidance. Watch this space.
highlight the different states-of-play for each of the US, Eurozone and UK
economies with respect to growth and the outlook for inflation. In the US, fundamentals are improving, growth
is expected to pick up this year and the output gap is expected to eventually
close. At the same time the Eurozone
remains in recession while in the UK, the economy is finding it difficult to
generate momentum with the result a large and persistent output gap. While there was no action from either central
bank today, we would expect both to be more aggressive, especially if rates
continue to head higher. Accommodative
monetary policy is still alive and well.