ECB: market participants rate expectations on a wait-and-see approach - Wells Fargo

While global central banks have begun to tighten policy, the ECB has continued its mostly accommodative stance, and market participants have adopted a wait-and-see approach to future policy rate expectations, point out analysts at Wells Fargo. 

Key Quotes: 

“Policy normalization has taken a significantly slower pace in the Eurozone compared to the U.S. Although the European Central Bank (ECB) announced late last month its decision to taper asset purchases from €60 billion per month to €30 billion per month beginning in January 2018, policy is still largely accommodative, with the ECB’s deposit rate still in negative territory. However, economic conditions in both the Eurozone and U.S. have some similarities: solid GDP growth in the third quarter, lower unemployment rates and slowly improving inflation leave many wondering why the ECB has been so slow on the uptake to tighten policy relative to other central banks.”

“The spread between futures contracts for the fed funds rate and comparable Euro Overnight Index Average (EONIA), the Eurozone’s overnight interbank rate, suggests current policy divergence is expected to persist for some time. In November, the spread is 151 basis points, and interest rate futures imply that the widening reaches 200 basis points by October 2018."

“However, the more likely story is that of mismatched expectations. When the ECB announced its decision to taper last month, the euro actually declined more than 2 percent against the dollar. Even though the decision was generally a move toward less accommodation, it was viewed as dovish.”

“Until the ECB begins to raise rates, we may continue to see mismatched expectations. At this point in the cycle, market participants need evidence of future rate hikes to price in upward movement in futures contracts, especially as other central banks have already begun to tighten. 

“For now, the wait-and-see approach to monetary policy in the Eurozone on the part of market participants will likely continue.”