ECB: Monetary and financial conditions still very loose - Nomura

Although the euro and bond yields have risen quite sharply in the past week or two, overall monetary and financial market conditions have not tightened that much, according to the research team at Nomura.

Key Quotes

“In the meantime regional and broader global growth indicators have improved. And core inflation in the eurozone has edged up. Against this backdrop, and barring a more sudden and aggressive tightening of monetary conditions, we believe the ECB is still on course to announce in September that a QE tapering campaign will commence next January.” 

“The global economic climate is very different today in our view relative to when Chairman Bernanke generated a so-called taper tantrum in May 2013. Global growth is stronger at present than it was back then. Vulnerabilities and external imbalances in many major emerging markets in the meantime have declined. And as many central bankers have noted, a much more broadly based revival in investment growth in the major economies appears to now be under way. This last feature is important because it could herald a cyclical pick-up in productivity growth which would support growth but quell inflation at the same time. The risk of a large positive inflation shock that would, in turn, generate unanticipated monetary tightening would accordingly be low assuming this productivity revival unfolds.”

“Still, the ECB will inevitably be mindful of asset price gyrations in the period ahead. At the very least policymakers will stress – via their forward guidance - that policycontrolled interest rates will remain exceptionally low for the foreseeable future even as the QE programme unwinds. More generally, they will likely stress that monetary policy will remain extraordinarily accommodative, just less accommodative that it used to be because deflation risk has now been removed. Moreover, should – against our expectations – asset prices respond more sharply to the prospect of a policy normalisation phase, the ECB will probably communicate that it can swiftly reverse its intentions (and actions) if necessary.”