EZ Rates: ECB policy preview. Expect more entrenched dovishness (Eugene Leow)

EU rates hostage to growth and Covid-19.
Eugene Leow22 Jul 2021
    Photo credit: Unsplash Photo

    Market participants will be looking to see how the European Central Bank (ECB) tweaks policy guidance later today under its newly revamped monetary policy strategy. Some of the key points in the new strategy include:

    -defining price stability to a clear and symmetric 2% target in the medium term (compared to an “inflation rate below but close to 2%” previously)

    -the cost of owner-occupied housing is set to be included in the price index over an unspecified timeframe

    -to react forcefully or persistently to deflationary shocks when close to the zero bound

    -commitment to a comprehensive climate-related action plan

    Forward guidance could be strengthened, but we note that the Deposit Rate has been below zero since 2014 with short-term EUR swaps generally not anticipating any rate hikes for an extended period. We suspect that there would be plans to ensure that quantitative easing remains in place when the Pandemic Emergency Purchase Programme (PEPP, EUR 1.85) expires in March 2022. The current pace of bond buying is about EUR100bn per month (of which EUR 80bn PEPP and EUR 20bn Asset Purchase Programme) and is set to slow to just EUR 20bn when PEPP ends. This would entail a far sharper taper timeline than what market currently expects from the Fed. An asset purchase pace of about EUR30-40bn in April (post PEPP) would probably be more palatable and that would require more leeway for the APP to buy bonds.

    There may not be direct implications on EUR yields / rates. German inflation expectations (as measured by breakevens) have come off high but are still elevated compared over the past few years. We are not convinced that stronger guidance that short-term rates would stay low and that asset purchases would be larger than the current default taper plan (end of PEPP by March 2022) indicate could do much to lift inflation expectations. Longer-term EUR rates are likely still held hostage to the growth outlook and how this could be impacted by rising COVID-19 cases in several parts of Europe. On balance, we think that the Eurozone is better placed than many parts of the world to handle COVID-19 given high levels of vaccinations. However, cautious sentiment is likely to linger, keeping EUR rates depressed until the current COVID-19 wave recedes.


    Eugene Leow

    Rates Strategist - G3 & Asia
    [email protected]

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd. It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong SAR Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.