Carsten Brzeski, the Global Head of Macro for ING Research, notes that the ECB’s last news conference left many market participants a bit puzzled about the ECB’s exact reaction function, but the just-released minutes of the meeting shed more light on what the bank's thinking.
"The ECB’s last news conference left many market participants a little puzzled about the exact shape of the ECB’s reaction function. There were simply too many ‘holistics’, ‘multifaceted’, ‘downstreams’ and ‘upstreams’ rather than a clear description of how the ECB would react to higher inflation and higher bond yields. Fortunately, several speeches and some blog entries since the March press conference have clarified the ECB’s current thinking. In our view, a recent speech by ECB board member Isabel Schnabel has become the best compass we could find to see where the ECB’s needle is currently pointing to."
"In fact, what Schnabel told us and what the minutes of the March meeting also reflect was that the ECB accepts higher longer-term nominal rates as a result of higher inflation expectations. So, as long as real rates remain stable, everything is fine. Any increase in real rates will only be tolerated by the ECB if it reflects improved growth prospects. Consequently, the ECB’s current reaction function can be summarised as: so long as bond yields rise for good reasons, the ECB is relaxed. If they start rising for the wrong reasons, the ECB will intervene. This is no real yield curve control but rather a soft and moving cap on yields."
"In the end, the debate or even fear of surging bond yields was a bit of a storm in a teacup. Or put differently, financial markets quickly understood that the acceleration of eurozone inflation was - and will be - mainly the result of one-off factors. This kind of inflation is rather deflationary and definitely no reason for the ECB to react with any premature tightening. On the contrary, the ECB has made clear that it will look through any temporary increase in inflation and would not tolerate an unwarranted tightening of financing conditions."
Risk Warning: Trading Forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.42% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Prior to trading, you should take into consideration your level of experience and financial situation. TeleTrade strives to provide you with all the necessary information and protective measures, but, if the risks seem still unclear to you, please seek independent advice.
© 2011-2021 Teletrade-DJ International Consulting Ltd
Teletrade-DJ International Consulting Ltd is registered as a Cyprus Investment Firm (CIF) under registration number HE272810 and is licensed by the Cyprus Securities and Exchange Commission (CySEC) under license number 158/11.
The company operates in accordance with Markets in Financial Instruments Directive (MiFID).
The content on this website is for information purposes only. All the services and information provided have been obtained from sources deemed to be reliable. Telerade-DJ International Consulting Ltd ("TeleTrade") and/or any third-party information providers provide the services and information without warranty of any kind. By using this information and services you agree that under no circumstances shall TeleTrade have any liability to any person or entity for any loss or damage in whole or part caused by reliance on such information and services.
TeleTrade cooperates exclusively with regulated financial institutions for the safekeeping of clients' funds. Please see the entire list of banks and payment service providers entrusted with the handling of clients' funds.
Telerade-DJ International Consulting Ltd currently provides its services on a cross-border basis, within EEA states (except Belgium) under the MiFID passporting regime, and in selected 3rd countries. TeleTrade does not provide its services to residents or nationals of the USA.