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More from ECB on tightening plans

We had several comments from ECB official over the weekend and this morning  Some were linked to the G-20 meeting and the US matters while what we’ve heard from Ignazio Visco is more connected to the current hot topic of rate hike prospects in the Eurozone.

The best headline to covered the former issue of answering to the US political agenda is a comment that the US is ’still in a learning phase on global economy’. There were also several opinions of other officials after G-20 that the US envoy, Treasury Secretary Steve Mnuchin was ill prepared for the talks - and yet the meeting ended with no open critique of what the US plans for global trade.

The comments from Visco on policy prospects should act against the market chatter that there could be a deposit rate hike even before the QE program runs its course. He stressed that the policy tools of ECB are deployed in a package, and any actions will be discussed referring to this package (of QE plus rate policy). He stressed the sequentiality of any tightening to come - QE taper will come first. This is also what ECB policy guidelines say: rate hikes won’t rise until well past the end of bond buying. But even this first step is in his view quite far ahead.

  • Visco can’t say that QE is somehow coming to an end
  • consistency between the tools is important
  • if ECB signals QE end then it won’t be able to keep saying that rates will remain low for an extended period
  • ECB could shorten the break between the exit from QE purchases and the moment of the first rate hike

 While the last bullet taken alone sounds hawkish, reading his whole explanation how the change in policy is going to be implemented suggests he sticks to the dovish camp. His views are close to Peter Praet’s who late last week stressed the strong logic in guidance on policy do file download link

  Weaker USD may lead to EURUSD bumping once again into the upper bound of the corridor; source: xStation5

The euro is not leading the G-10 pack so the market is still in the mood to push it ot the stronger side whenever there is any headline that seems to suggest that ECB is moving closer to a decision on rates. This may be due to the French elections factor which is weighing on the single currency, especially that the deadline for changing party candidates is behind us and the conservatives are still going with Francois Fillon whose support dropped badly in late January.

The morning release from Germany showed that PPI inflation moved from 2.4% YoY to 3.1% while the market assumed it would go to 3.2% - that is the first worse-than-expected print since September, which could also serve as a reminder that the surge of CPI is not going to continue indefinitely and the ECB is right trying to wait it out while focusing on core measures.


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