{"id":1306,"date":"2013-07-05T07:00:00","date_gmt":"2013-07-05T07:00:00","guid":{"rendered":"http:\/\/starthostunlimiteddmffassi-ss.stackstaging.com\/bondworld.ch\/home\/sites\/20b\/7\/760c69a11c\/public_html\/investmentworld.ch\/index.php\/2013\/07\/05\/viewpoint-europe-too-engages-in-forward-guidance-on-interest-rates\/"},"modified":"2013-07-05T07:00:00","modified_gmt":"2013-07-05T07:00:00","slug":"viewpoint-europe-too-engages-in-forward-guidance-on-interest-rates","status":"publish","type":"post","link":"https:\/\/www.investmentworld.eu\/ch\/viewpoint-europe-too-engages-in-forward-guidance-on-interest-rates\/","title":{"rendered":"Viewpoint: Europe, too, engages in forward guidance on interest rates"},"content":{"rendered":"
Europe, too, engages in forward guidance on interest rates. The ECB took a marked shift in the management of monetary policy, announcing that \u201cthe Governing Council expects the key ECB interest rates to remain at present or lower levels\u201d: this should prove a much more useful move than a further cut of the refi rate. We think the odds of additional cuts are still much dependent on the data. Yet, hurdles for further moves within the Council seem very limited. The BoE, with new Governor Carney at the helm, has issued a statement announcing that in August it will assess whether to introduce some form of systematic forward guidance, including the possible use of \u201cintermediate thresholds\u201d…<\/div>\n

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As expected, the ECB left the refi rate unchanged at 0.5% and the deposit rate at zero. However, the communication greatly exceeded expectations. Not only the ECB  reasserted that liquidity will remain ample at length, and that exit is very distant, but also took (with unanimous decision) a significant step forward in the management of monetary policy, committing to keep \u201ckey interest rates\u201d (refi and deposit rate) \u201cat present or lower levels for an extended period of time\u201d. The introduction of forward guidance on rates  is an important innovation for the ECB, which had repeated for years that it would \u201cnever precommit on the future path of interest rates\u201d. The decision on how long rates will be kept at their current levels, or lower, will be taken on the basis of prospects for: i) price stability, ii) economic growth, and iii) the monetary aggregate and credit trends, which area already guiding criteria in the approach to two pillars of monetary policy management. Understandably, the ECB does not want to tie the interest rate path to the level of one or more macroeconomic variables, as the FED has done, as the introduction of forward guidance already marks an important step forward for the ECB. Draghi said that it is too early \u201cto speculate on further developments in the communication\u201d, and in greater detail on the possible reference to the level and path of liquidity and\/ or economic variables. By making a binding commitment, the ECB, in Draghi\u2019s words, intends to \u201ccommunicate a downward bias in interest rates\u201d. Therefore, the ECB aims to bring rates expectations to levels it deems appropriate. Draghi specified that 0.5% is not a minimum threshold for the refi rate, and that the ECB is technically ready to cut the deposit rate. The markets\u2019 reaction was generally positive. Draghi indicated that the ECB believes the introduction of formal guidance is the best way to respond to increased market volatility and to the recent rise in yields which is hard to tell whether it is a permanent or transitory nature of. Further tightening of monetary conditions is not appropriate for the euro area economy, which remains in recessive territory despite the recent improvement in confidence indices. In the ECB\u2019s assessment, risks to the economic outlook are still skewed to the downside, while risks to price stability are considered \u201cstill\u201d broadly balanced. The \u201cstill\u201d is an addition to the June statement, and lets on that the ECB thinks risks could shift somewhat. As regards the other policy instruments, Draghi reasserted that OMT remain a policy instrument and an effective backstop, and that it has produced \u201cuniversally acknowledged\u201d benefits for everybody. Draghi said that the legal documentation will \u201cprobably\u201d be made public when a country applies to the ESM.
For what concerns other policy measures, the ECB said that the possibility of joint interventions with the EIB on the ABS market is still being examined, and that the ECB is acting as advisory. Our forecast on interest rates has not changed: we continue to think that if economic data confirm the shy signs of a recovery, albeit from very depressed levels, the ECB will stay on hold. Yet, the introduction of forward guidance suggests the hurdles for future moves on rates are very limited. The deposit rate may only be cut into negative territory if fragmentation on the European interbank markets does not improve further, and the move would in any case be conditioned to a refi rate cut.
The Bank of England, at its first meeting chaired by Carney, opted not to change either the lending rate (0.5%) or the asset purchase facility (GBP 375 billion), but surprised the markets nonetheless, with a press release in which it indicates that expectations for higher interest rates implied by the curve was \u201cnot warranted by the recent developments in the domestic economy\u201d. Also, the BoE announced that at its August meeting it will discuss whether or not to introduce some systematic form of forward guidance, including the possible use of \u201cintermediate thresholds\u201d, an assessment of which was requested in the Chancellor\u2019s latest remit letter to the MPC. The BoE statement pushed down interest rates expectations (end of 2015) by around 15 basis points.<\/p>\n

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Appendix<\/strong><\/div>\n

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Source: BONDWorld – Intesa Sanpaolo \u2013 Research Department<\/p>\n","protected":false},"excerpt":{"rendered":"

Europe, too, engages in forward guidance on interest rates. The ECB took a marked shift in the management of monetary policy, announcing that \u201cthe Governing Council expects the key ECB interest rates to remain at present or lower levels\u201d: this should prove a much more useful move than a further cut of the refi rate. […]<\/p>\n","protected":false},"author":2,"featured_media":3535,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"telegram_tosend":false,"telegram_tosend_message":"","telegram_tosend_target":0,"footnotes":"","_wpscp_schedule_draft_date":"","_wpscp_schedule_republish_date":"","_wpscppro_advance_schedule":false,"_wpscppro_advance_schedule_date":"","_wpscppro_dont_share_socialmedia":false,"_wpscppro_custom_social_share_image":0,"_facebook_share_type":"","_twitter_share_type":"","_linkedin_share_type":"","_pinterest_share_type":"","_linkedin_share_type_page":"","_instagram_share_type":"","_medium_share_type":"","_threads_share_type":"","_google_business_share_type":"","_selected_social_profile":[],"_wpsp_enable_custom_social_template":false,"_wpsp_social_scheduling":{"enabled":false,"datetime":null,"platforms":[],"status":"template_only","dateOption":"today","timeOption":"now","customDays":"","customHours":"","customDate":"","customTime":"","schedulingType":"absolute"},"_wpsp_active_default_template":true},"categories":[50],"tags":[],"class_list":["post-1306","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-weekly-analysis"],"blocksy_meta":{"styles_descriptor":{"styles":{"desktop":"","tablet":"","mobile":""},"google_fonts":[],"version":6}},"_links":{"self":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/1306","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/comments?post=1306"}],"version-history":[{"count":0,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/1306\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media\/3535"}],"wp:attachment":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media?parent=1306"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/categories?post=1306"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/tags?post=1306"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}