A note on the European Central Bank from Wells Fargo, which concludes:
While global central banks have begun to tighten policy, the ECB has continued its largely accommodative stance, and market participants have adopted a wait-and-see approach to future policy rate expectations.
They say (this is in brief only):
Global central banks have slowly begun to reverse largely accommodative monetary policy
- Bank of England raised its target rate
- similar sized rate hike by the Bank of Canada in September
- the FOMC is expected to raise the fed funds rate at its December meeting
However, policy normalization has taken a significantly slower pace in the Eurozone compared to the U.S.
However, economic conditions in both the Eurozone and U.S. have some similarities:
- solid GDP growth in the third quarter,
- lower unemployment rates
- and slowly improving inflation
leave many wondering why the ECB has been so slow on the uptake to tighten policy relative to other central banks
The spread between futures contracts for the fed funds rate and comparable Euro Overnight Index Average (EONIA), the Eurozone's overnight interbank rate, suggests current policy divergence is expected to persist for some time
On the EUR:
- When the ECB announced its decision to taper last month, the euro actually declined more than 2 percent against the dollar. Even though the decision was generally a move toward less accommodation, it was viewed as dovish.
- Until the ECB begins to raise rates, we may continue to see mismatched expectations.
What Does ECB Policy Look Like Going Forward?
we predict inflation in the Eurozone to trend higher in the coming months, likely pushing the ECB to begin to hike rates in early 2019. However, for now, the wait-and-see approach to monetary policy in the Eurozone on the part of market participants will likely continue.
