Press Release - Account of the monetary policy meeting of the Governing Council of the European Central Bank, held in Frankfurt am Main on Wednesday and Thursday, 25-26 October 2017
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 monetary policy meeting on 6-7 September 2017 a positive underlying tone had persisted in financial markets. Two main factors seemed to have driven cross-asset price correlations: first, the return of the “reflation trade” that had pushed long-term interest rates, equities and the US dollar broadly higher; and, second, the euro area had been shielded to some extent from the upward pressure on yields, mainly owing to expectations of continued ECB monetary policy accommodation.
In recent weeks there had been a significant reversal of the global retrenchment in sovereign bond yields that had been recorded over the summer. This global phenomenon was reflected in a substantial repricing in the US Treasury market. Ten-year US Treasury yields had increased by around 35 basis points since the Governing Council’s September monetary policy meeting.
The euro area sovereign bond market had only been affected to a limited extent by this broad shift in global yields, in spite of the usual co-movement observed between the ten-year US Treasury yield and the ten-year German government bond yield. Euro area sovereign bond yields had not increased markedly since late September 2017 and market volatility remained very low. There was a strong market consensus that net purchases under the asset purchase programme (APP) would extend into 2018 and euro area sovereign bond spreads had generally declined in October.
With regard to monetary policy expectations for the United States, after the September Federal Open Market Committee meeting the probability of a rate hike in December 2017 had risen from 25% to nearly 90%. A repricing of interest rate expectations had also taken place in the United Kingdom after the release of the minutes of the Bank of England’s Monetary Policy Committee meeting on 14 September 2017, which indicated that a majority of the Committee members had expressed the view that some withdrawal of monetary stimulus was likely to be appropriate over the coming months.
In the euro area there had been no significant change in market expectations regarding ECB policy rates. The first 10 basis point increase in the deposit facility rate continued to be priced in for the beginning of the second quarter of 2019. This confirmed that the Governing Council’s forward guidance had anchored euro area short-term rates very well despite changing market expectations of interest rate hikes in the United States and the United Kingdom.
A stronger US growth outlook, as well as diverging monetary policy expectations between the euro area and the United States, had also had an impact on global equity and foreign exchange markets. Stock prices had continued to rise worldwide and the broad strengthening of the US dollar against most other currencies reaffirmed that developments in the United States, with regard to monetary policy and the budget outlook, had been dominating market sentiment lately.
Mr Cœuré remarked that equity investors currently appeared to be trying to manage the trade-off between the search for yield and the risks related to stretched valuations. The latest surveys of fund managers suggested increasing outflows from US equity markets and continued inflows into stock markets in the euro area, Japan and emerging markets, especially in Asia. Balance of payments data in Europe also confirmed this diversification away from the US market towards the rest of the world with, in particular, continuing net inflows into European equities.
Volatility, expressed in terms of standard deviation from18-year historical averages, had trended even lower in recent weeks across asset classes, such that it had now reached levels only seen a few times during the past 18 years.
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.
As regards the external environment, survey-based indicators pointed to stable global growth in the third quarter of 2017. The global composite output Purchasing Managers’ Index (PMI) had remained unchanged in September, close to its long-term average.
The global recovery continued to show signs of synchronisation. A similar broadening of momentum was seen in global trade; having slowed in the second quarter of 2017, it had rebounded according to the latest monthly data. Leading indicators continued to signal positive near-term prospects.
Global inflation had picked up in August. Annual consumer price inflation in the OECD area had risen to 2.2%, driven by rising energy prices. Excluding food and energy, inflation had remained stable at 1.8%. Global producer price inflation excluding food and energy had picked up recently, which could signal some inflationary pressures in the pipeline. Brent crude oil prices had trended upwards since mid-2017, standing at USD 58.1 per barrel on 24 October. Over the same period the euro had depreciated by 1.1% vis-à-vis the US dollar, but had remained broadly stable in nominal effective terms against the currencies of the euro area’s 38 major trading partners. Exchange rate volatility had receded.
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