Analysts at BBH explains that the ECB continues to try to calibrate its communication with the evolving economy and its risk assessment.
“It appears that the confidence of officials has outstripped their willingness to express it for fear of spurring precisely what has happened: a premature tightening of financial conditions.”
“Recall that without inflation on a durable and self-sustaining path, the ECB (with Draghi at the helm) is reluctant to remove accommodation. The ECB will most likely add another 360 bln euros of assets to its balance sheet this year and more next year, even if at a slower pace. The record of last month's ECB meeting suggested that the central bank is prepared to alter its risk assessment for an increase in asset purchases. Investors have long assumed this to be the case, and Draghi has pushed back against ideas that deposit rate should be hiked before the asset purchases are complete.”
“In Germany, roughly half the backing of nominal interest rates can be explained by an increase in the 10-year breakeven. In the US, the nominal 10-year yield has risen 25 bp, but the 10-year breakeven rose by only five basis points. Italy's performance is more like the US experience. Only about a quarter of the nominal yield increase can be accounted for by the rise of inflation expectations as reflected by the breakeven.”
“At stake for the ECB is tweaking its forward guidance and risk assessment.”
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