Patrick Jacq, Research Analyst at BNP Paribas, points out that the ECB is gradually changing its rhetoric as in its latest statement the ECB removed the previous reference to “lower rates” and noted that risks to growth were broadly balanced.
“In our view, increasing confidence in the economic outlook will give the ECB room to prepare markets before the end of the year for an end to quantitative easing and a rate adjustment next year. However, the money market curve continued to flatten after the ECB meeting which we see as inconsistent with the policy outlook over the next two years.”
“Fed continues to forecast additional rate hikes. At its latest meeting the FOMC lowered its 2017 inflation forecast slightly but kept its projections for 2018 and 2019 unchanged and lowered its 2017 unemployment rate forecast. Against this backdrop the FOMC continues to forecast additional rate hikes including another one this year. Again, this is not what the US money market is pricing in. We expect an adjustment at the front end to push up rates.”
“We expect the differences between the central bank policy outlooks and market pricing to be closed by a change to the latter and so see little value at current rate levels.”
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