Europe: Monetary policy may have muted impact on markets – BNPP

Gajan Mahadevan, Quantitative Strategist at Lloyds Bank, do not expect any changes to interest rate policy from either the Bank of England (BoE) or European Central Bank (ECB).

Key Quotes

“Interestingly, the risks around the next rate move are now skewed to the upside, particularly if economic data in the UK and Europe remain firm and inflation continues on its upward path.”

“Following recent announcements, we expect both the BoE and ECB to leave interest rate policy unchanged over the next twelve months. Last November, the BoE moved to a ‘neutral stance’, following the UK economy’s impressive post-Brexit performance. Survey data for Q4 2016 have also been robust, with the composite PMI in December – across the manufacturing, construction and services sectors – at its strongest since July 2015. In addition, November’s industrial production rose strongly and the UK consumer continues to show resilience. However, in spite of the data, the BoE’s Chief Economist, Andrew Haldane, believes that the fundamental view adopted by the MPC – a drop in the rate of GDP growth driven by post-referendum uncertainty and the squeeze on consumer purchasing power – will play out, and it is now a question of timing. That being said, with inflation on a clear upward trajectory, should the data remain firm, there is a risk that the BoE may talk up the prospects of future policy tightening.”

“Last month, the ECB extended its quantitative easing programme to December-2017, although it announced a reduction in the pace of monthly purchases from €80bn to €60bn. In addition, it increased the universe of eligible bonds by enabling the purchase of assets yielding lower than the deposit rate (-0.40%). We do not anticipate the ECB altering from this course. However, with the Euro area economy also holding up well in the face of elevated political uncertainty, and upside risks to European inflation, future policy actions are also skewed asymmetrically towards earlier tightening.”