Reversal of dovish ECB policy unlikely any time soon

September 9, 2021

Jeffrey Sacks

Head of EMEA Investment Strategy

SUMMARY

At its latest meeting, the European Central Bank noted high levels of consumer and business debt. It reiterated the need for favorable financing. We believe the first interest rate hikes and significant contraction of the stretched ECB balance sheet are unlikely any time soon.

ECB interest rates were left unchanged at its latest meeting with the deposit rate at -0.5%, the refinancing rate at 0.0%, and the minimum lending facility at +0.25%.

There was a slowing of bond buying within the Pandemic Emergency Purchase Programme (PEPP) versus the level of purchases in the last two quarters. But no changes were made to the programme’s €1.85 trillion size.

The Asset Purchase Programme (APP), reinvestment policy, and long-term refinancing operations are unchanged. The central bank’s December meeting will give more detail on the last phase of PEPP and the ongoing APP.

Inflation expected to moderately exceed the ECB’s 2% target for a transitory period. Inflation forecast has risen for 2021 to 2.2%. A key indicator moving forward will be “second round impacts”, with price pressures potentially impacting on wage pressures, which could lead to more durable inflation pressures.

ECB said GDP growth ‘clearly rebounding,’ with the speed dependent on the path of COVID. The real GDP growth forecast for 2021 is rising to 5.0%. After the announcement, equities and the euro were steady, and bonds – particularly periphery bonds – rallied strongly.

We believe the first interest rate hikes by the ECB are not likely anytime soon. The latest announcement is supportive for equities, with greater confidence in the growth outlook, without offering fresh reasons to buy.

Further market upside will be driven mainly by the probable ongoing surge in earnings, valuations still below the global average, and many investors still lowly-weighted.