19 May 2016 Press Release
European Central Bank
Directorate General Communications
Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Tel.: +49 69 1344 7455, E-mail: media@ecb.europa.eu
Website: www.ecb.europa.eu
Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 20-21 April 2016
1. Review of financial, economic and monetary developments and policy options
Financial market developments
Mr Cœuré reviewed the latest financial market developments.
1. Review of financial, economic and monetary developments and policy options
Financial market developments
Mr Cœuré reviewed the latest financial market developments.
Since the Governing Council’s previous monetary policy meeting on 9-10 March 2016, developments in global markets had become more supportive of risk appetite. The outcome of the March Federal Open Market Committee meeting had been interpreted by market participants as implying that the future path of US rates would be both more gradual and less steep than previously expected. The US dollar had depreciated against major currencies over the five weeks since the March Governing Council monetary policy meeting. US equity indices had advanced further, with the S&P 500 rising by around 6%, and the ten-year US Treasury yield had edged lower, fluctuating in a 30 basis point range.
At their meeting on 17 April 2016, OPEC and non-OPEC countries had not agreed on a freeze in crude oil production, which had led to a significant drop in oil prices following a previous upward trend. Market-based measures of inflation expectations in the euro area, as measured by the five-year forward inflation-linked swap rate five years ahead, had remained broadly unchanged, showing a divergence since March 2016 from the slowly rising market-based inflation expectations in the United States.
In foreign exchange markets, since the Bank of Japan’s decision to lower interest rates to below zero in late January 2016, the Japanese yen had appreciated by just over 10% against the US dollar. This appreciation in the first quarter of 2016 was attributed to safe haven and repatriation flows into the Japanese yen before the fiscal year-end in Japan. The pound sterling had depreciated against the euro and the US dollar since the beginning of the year. Commentators associated these developments with an increase in the uncertainty about the outcome of the 23 June referendum on UK membership of the European Union. Moreover, the UK banking sector was seen as impacted, since the cost of protection against default of the five largest British banks had continued to increase steadily compared with that of US and European banks. Finally, on 7 March 2016, the Bank of England had announced three additional liquidity-providing operations to take place around the date of the referendum.
Turning to the euro area, the impact of the decisions taken by the Governing Council on 9-10 March 2016 had been positive across market segments. The announcement of the €20 billion increase in monthly purchases, to €80 billion, under the asset purchase programme (APP) and of the new corporate sector purchase programme (CSPP) had led to sizeable changes in investors’ positioning. Some compression of intra-euro area government bond spreads had subsequently been observed amid a generally positive impact on yields. The ten-year German government bond yield had declined to within a few basis points of its all-time low, observed in April 2015. Market-implied volatilities for long-dated swaps on the German government bond curve seemed to imply that investors were pricing in a somewhat higher probability of a further decline in yields than of an increase.
With regard to the APP, market liquidity conditions had so far remained broadly conducive to its smooth implementation. The recent changes to the parameters of the ECB’s securities lending arrangements, as of 4 April, had been welcomed by market participants.
European corporate bond spreads had seen a general repricing. The narrowing of spreads had extended beyond the market segments expected by market participants to be eligible for the CSPP – notably, spreads on sub-investment grade bonds had also narrowed considerably. Exposure to corporate risk had increased. Position-taking in European credit default swap (CDS) indices for corporate bonds had more than doubled since the ECB’s announcement of the CSPP. A possible reason was that the CDS market for corporate bonds could also be used to hedge some macro risks.
Counterparties had furthermore reported that the CSPP announcement had also marked a noticeable improvement in corporate issuance. Issuance volumes and announcements of new deals had increased substantially in recent weeks, although they remained low overall compared with last year. More evidence and analysis was needed to fully understand the determinants of the supply side. The purpose of such issuance also remained to be understood, whether related to funding investment projects, M&A financing or liability restructuring. One feature had been that issuers were issuing more bonds with longer maturities.
Regarding developments in the money markets and ECB policy expectations, during the 10 March press conference markets had largely priced out expectations of further rate cuts, but some reassessment took place later on, following the 7 April release of the March monetary policy account and public statements by Governing Council members, both of which reaffirmed the Council’s willingness to take further action if needed. At the same time, judging from implied densities of future market rates, uncertainty about future moves had declined and the probability attached to significantly lower rates had noticeably diminished. The focus of attention had also very much shifted to the implementation details of both the CSPP and the second series of targeted longer-term refinancing operations (TLTRO II).
The global environment and economic and monetary developments in the euro area
Mr Praet reviewed the global environment and recent economic and monetary developments in the euro area.
Global indicators continued to suggest subdued global growth. The global composite output Purchasing Managers’ Index (PMI) had increased to 51.3 in March, from 50.8 in February, although its average for the first quarter of 2016 had declined to 51.6, compared with 53.1 in the fourth quarter of 2015. The decline had been more marked in services than in the manufacturing sector, suggesting – at least based on survey indicators – that weakness was spreading from already weak manufacturing into the services sector, especially in the advanced economies. While not necessarily implying a generalised weakening in economic activity, these developments deserved close monitoring. Global trade in goods had remained modest early in 2016. Although growth in the volume of world imports of goods maintained momentum, rising by 1.2% in three-month-on-three-month terms in January, after 1.5% in December, the PMI for new export orders in March had fallen from 50.9 in the fourth quarter of 2015 to 49.8 in the first quarter of 2016.
Global inflation remained low. For the OECD area, annual consumer price inflation had declined to 1.0% in February, after 1.2% in January. Excluding food and energy, inflation had remained unchanged at 1.9%. Since the Governing Council’s meeting on 9-10 March, commodity prices had risen, with Brent crude oil prices up by 6.5% to around USD 42 per barrel and non-oil commodity prices up by 2.5% in US dollar terms, while the nominal effective exchange rate of the euro had appreciated by 0.4% vis-à-vis 38 major trading partners.
Turning to euro area activity, incoming hard data since the Governing Council’s 9-10 March meeting had been positive, with industrial production including construction and industrial production excluding construction 1.8% and 1.1%, respectively, above their average levels for the fourth quarter of 2015. At the same time, the Commission’s Economic Sentiment Indicator (ESI) and the composite output PMI had declined from the fourth quarter of 2015 to the first quarter of 2016.
Directorate General Communications
Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Tel.: +49 69 1344 7455, E-mail: media@ecb.europa.eu
Website: www.ecb.europa.eu
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