The research team at Lloyds Bank remains of the view that neither the BOE nor the ECB will change their policy rates throughout the remainder of 2017.
“With the subsidence of European political event risk, ECB policy is garnering greater attention from the market. There has been a notable shift in rhetoric from central bank speakers, including President Draghi. At its latest policy meeting in late April, interest rates were left unchanged, but, importantly, Draghi noted that the “downside risks to the economy have further diminished.” The underlying trends in European economic data are supportive of the broadening and durable recovery in the region. Most notably, the Euro Area Composite PMI is at a 6-year high and the German IFO survey shows business sentiment is the most buoyant it has been since German re-unification in the early 1990s.”
“There is growing speculation that the ECB will shift its forward guidance and possibly tighten monetary policy more quickly than the market is anticipating. We believe that they will remove reference to their downside interest rate bias in June, shifting towards a more neutral stance within their forward guidance. However, in our view, it is premature for policy makers to be considering a reduction in the pace of monthly asset purchases or increase policy rates. We expect the ECB to maintain its quantitative easing programme at €60bn/month for the remainder of the year and forecast the central bank to communicate a reduction in asset purchases for 2018 at its September meeting, potentially averaging €40bn/month in H1. We see the deposit rate on hold until H2 2018.”
“The BOE is also at an interesting juncture. At April’s meeting, Kristin Forbes dissented against the rest of the MPC in calling for an immediate hike in the Bank Rate. She maintained this position at May’s meeting. Her influence, however, is likely to wane in the coming weeks as her term expires at the end of June. However, it was carefully noted by the market that “relatively little” further upside news on activity or inflation would be required for “some” other members to be receptive to a tighter policy stance. In spite of this, we see the bar to imminent tightening as relatively high. While we have CPI inflation peaking at 3.3% (well above the central bank’s forecast of 2.8%), Governor Carney has already indicated that he is willing to look through this and described its underlying drivers as transitory.”
“More importantly, Q1 GDP growth disappointed at just 0.3%q/q and wage growth remains muted. Given this, and emerging signs of consumer weakness as sterling’s post-referendum drop reduces purchasing power, and in the backdrop of political uncertainty (UK general election and Brexit negotiations), the MPC will be wary of reversing the stimulus of August 2016 prematurely, only to risk being pushed into another round of loosening further down the line. As such, we believe the BOE is likely to leave policy unchanged for the foreseeable future.”
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