Fra BNP Paribas:
The markets continue to question the effectiveness of piecemeal, individual central-bank policies, especially as they are starting to look like they lack ammunition. It seems increasingly clear that fixing global problems – a structural lack of demand, a debt overhang and misallocation of resources, to name a few – will have to go beyond the artificial support of monetary policy to encompass a broader-based policy response, including fiscal policy and structural reforms.
For the time being, however, aligning interests to generate this at the individual country level, let alone the global level, looks too ambitious. At least in the short term, therefore, structural problems are likely to continue to be tackled with traditional cyclical monetary-policy tools, which have proved the quickest and easiest to deploy so far.
As for the ECB, it delivered a broader range of measures in response to the persistence of low inflation and tighter monetary and financial conditions, and the initial market response was very positive. It faded subsequently, however, following the indications in the press conference that policy rates may have already bottomed out. There was much for markets to digest in the press conference and the response on day one is not always a good guide to the future.
Given the combination of long-term liquidity provision to banks on exceptionally favourable terms and the ECB’s willingness to broaden the range of assets being purchased, the net effect of the package still looks market-friendly, in our view. That said, it is going to remain very difficult to raise inflation back towards 2% and we expect the ECB will again come under pressure to do more. The hurdle now looks to be set rather higher than it was before, however, and we assume that additional policy accommodation is unlikely in the coming months in the absence of a major deterioration in economic and financial conditions.
That the ECB looks much less inclined to lower its policy rates further below zero is important for the exchange rate, with potential implications for monetary policy elsewhere. Following the ECB, a number of central banks are lined up to deliver monetary-policy decisions next week, including the Fed. Our expectations for the Fed are no action but a bias to hike, with the ‘dotplot’ indicating three hikes this year as opposed to the four envisaged in December.
The Fed’s growth forecast will be revised down marginally this year, but we expect the thrust of the medium-term forecast to remain broadly stable, with a bit of fine-tuning at the edges. We expect “uncertainty” with a dash of “foreign risk” to be the recipe the Fed will employ to justify no hike. Basically, we expect the view to be that US fundamentals are judged to be fine, especially as regards the consumer and the labour market. How the market will respond is uncertain.
The Fed’s message is likely to be more hawkish than is priced in, but the market may not believe that the Fed will, or will be able to, deliver what it would like. That is our view, since we see no further hikes this year. We are far from convinced we are done with episodic market stress and we think the economy will soften later in the year. Thus, we see a 40% chance of a hike in June, but our main case is no change for the rest of 2016. We can see market stress re-emerging if the market starts to price in more, earlier hikes, reducing the risk that they happen.
Other major central banks such as Bank of Japan (BoJ) and Bank of England (BoE) will go with the flow of unchanged policy. We expect the BoJ to take a wait-and-see stance at its policy meeting next week. The JPY is much stronger than it was before the bank introduced a negative rate in late January. But with just a month having passed, the BoJ will probably want to wait to examine its effects and side effects before taking any additional action. The recent stability of the JPY and the bounce in the equity market are also likely to make the BoJ comfortable for the time being. Should market conditions turn sharply for the worse, however, we expect the BoJ to respond, most likely by cutting the interest on excess reserves again.