ECB adopts less expansionary course

Mood indicators in the Eurozone are jubilant. Both the purchasing manager indices and the business climate index indicate that the economic dynamic in the Eurozone is set to rise in the coming months. Moreover, this recovery does not seem to be restricted to individual countries. Several EMU member states recently published robust economic signals. In this regard, the upswing in the Eurozone should become more broadly based.

The spectre of deflation, which had kept market players and monetary policymakers busy up until the end of the year, is not looming very large following the significant increase in European rates of inflation. The inflation pressure is certainly still low, but recent positive developments with regard to economic and inflation expectations have caused a degree of unease among monetary regulators. At the most recent ECB Council meeting, President Draghi no longer sounded as pessimistic as in the past. In the coming months, monetary policy is set to become less expansionary, in both word and action.

At the September meeting, the ECB is supposedly set to pursue a policy in line with the motto “reduce the dose but extend the prescription”, meaning that while securities purchases will continue up until the first half of 2018, the volume of bond purchases will be scaled back. In October of this year, we expect an increase to the deposit facility rate, from -0.40% to -0.25%. With a gradually recovering credit channel and a diminishing deflation risk, the ECB is able to introduce a further degree of normality to monetary policy, as it creates a symmetry between its interest rates again. However, it will primarily remain clearly expansionary in nature.  Long-term yields should also rise by the end of the year. This reflects in particular improved economic development as well as the less expansionary ECB outlook.


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