Barclays on the ECB meeting minutes

Overall, the discussion is in line with our view that underlying inflation remains on a moderate recovery trend and is unlikely to accelerate in the near term.

The accounts also highlight financial stability risks from an exchange rate overshoot and future changes in forward guidance. The accounts state that financial conditions remained broadly supportive of the economic expansion, but some concerns remained. It was argued that the strengthening of the Euro was due to a decline in political uncertainty in the euro area and as well as lower expectations of higher interest rates in the United States. Nevertheless, while the accounts acknowledge that the recent euro appreciation likely reflected changes in relative fundamentals, there were concerns about the risk of an exchange rate overshoot in the future. On forward guidance, it was suggested that the language on forward guidance should be changed, as waiting too long could lead to misalignment between the Governing Council’s communication and the actual state of the economy, which could trigger pronounced volatility when communication would eventually have to shift. On the other hand, “it was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature”. All members of the General Council therefore agreed to retain all elements of forward guidance.

Overall, we believe that the minutes remain consistent with our baseline view on monetary policy. We expect an extension of QE into 2018 but also a reduction of its monthly pace to €35-40bn in H1 18 (which we expect to be announced in September/October) and further reduced to €15-20bn in H2 18. In 2018, we also expect two 10bp hikes in the deposit rate, in Q2 18 and Q4 18. In other words, to support the very gradual recovery in inflation we expect both QE and negative deposit rates to still be in place throughout 2018, albeit at less accommodative levels than in 2017 given we expect inflation to also be closer to target.

17 Aug 2017 - 15:21- Fixed IncomeEconomic Commentary- Source: Barclays

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