The European Central Bank (ECB) forum on central banking in Sintra surprised bond and currency markets with some hawkish comments from ECB President Mario Draghi, Bank of England (BoE) Governor Mark Carney, and Bank of Canada (BoC) Governor Stephen Poloz. Central banks are testing the waters for a policy shift. In particular, the BoC is firmly determined to shift its policy with a clear bias to hike rates sooner rather than later. We are more sceptical when it comes to the BoE. In the UK, the underutilisation (meaning UK’s economy is not running at full speed) is much larger than in Canada, making a policy shift much less urgent. We could well imagine that BoE Governor Carney just wants to talk up the currency in order to reduce imported inflation pressure, which has a considerable negative effect on purchasing power and hence on consumption in the UK. We remain highly sceptical that the BoE will actual change its policy in the coming months.
A policy shift by the ECB is also quite unlikely, but talk about phasing out the asset purchasing programme will intensify in the next weeks and months. The programme is scheduled to run at least until the end of this year. An extension will most likely be accompanied by a reduction of the monthly buying volume or even a phasing-out plan. However, we view it as highly likely that the ECB will not walk the talk in 2018. The upcoming Italian parliamentary elections in May 2018 have the potential to mess with the current positive backdrop. The fallout of the year-to-date euro appreciation could also be felt by year-end if it does not reverse, further limiting the ECB’s room to execute its policy shift. As in the UK, we view the underutilisation in the eurozone as considerable, fuelling our scepticism that the time is ripe for a policy shift by the ECB. We suspect that the ECB is currently testing the power of its words and could backpedal at any point.
Please also see a recent interview with David Kohl on the subject for “der Aktionär” (in German):