Fidelity ahead of ECB meeting: A new phase of central bank policy


David Simner, portfolio manager Fixed Income at Fidelity International provides his thoughts on what to expect from this Thursday’s ECB meeting.

The upcoming ECB meeting is arguably the most important market event of the month and investors will closely scrutinise Mr. Draghi’s announcement of any changes to the Asset Purchase Programme.

Over the past months, expectations have shifted towards a “lower for longer” approach by the ECB, with a smaller amount of monthly purchases paired with a longer extension of the QE programme. While estimates vary, consensus now expects monthly purchases to fall from the current 60bn EUR per calendar month to around 30bn EUR and the QE programme to be extended by nine months.

Such a scenario would allow the ECB to remain engaged for a longer period of time, and help push expectations of the first rate hike further into 2019. Moreover, from a technical perspective, while the net flow effect will be negative for European government bonds, as gross monthly purchases will fall, reinvestment of upcoming maturity will partially mitigate the net impact on the market.

Going into the ECB meeting, the risks appear skewed towards a more hawkish surprise by Mr. Draghi, particularly given the ongoing cyclical rebound across the Eurozone. However, with inflation still lagging and far from the ECB target, lack of wage pressures and risks of renewed EUR strength, Draghi will likely have to err on the side of caution.

The ECB will be keen to ensure that the tapering announcement does not cause another “Bund tantrum” and we can therefore expect strong forward guidance in the press conference. While purchases will slow, an interest rate rise remains very remote at this juncture and monetary policy will remain extremely accommodative for an extended period.

The ECB joins the Federal Reserve and, with all likelihood, the Bank of England among the central banks that favour a less accommodative monetary policy stance. The economic backdrop has certainly improved, and central banks have played a major role in the global growth rebound.

Today, however, “unorthodox” monetary policy tools have largely served their purpose and are clearly no longer needed. By removing stimulus, central banks are very gradually returning to a more normal policy stance, and are providing more leeway for conventional policy tools to be deployed later if required.

Investors, therefore, will need to exercise caution as markets enter a different phase with less central bank support than has been the case over the past decade.