ECB holds rate steady
The European Central Bank (ECB) has held its monetary policy steady. There were no changes to its suite of interest rates:
- The main refinancing rate stays at 0.0%
- The deposit rate has been held at -0.50%
This was entirely expected.
Furthermore, the timing of “any adjustments” to the key rates would take place “some time after” the end of the APP. This is the same as the last meeting.
ECB chooses to maintain the conclusion of its APP in Q3
The Governing Council has also chosen to maintain its view that the Asset Purchase Programme (APP) which is its main quantitative easing policy, would come to an end in Q3.
At the March meeting, the ECB left an “if the incoming data support…” section on this in the statement. However, this time they have confirmed that it would indeed be ending in Q3.
What does this mean?
Coming into the meeting there was a potential that the ECB could take a slightly more hawkish view and bring an end to the APP in Q2. However, these calls have been resisted. The market is reacting to this.
Furthermore, there is an argument that the Governing Council could have changed the language on when rate adjustments might come. A change to the “some time after” could have also been seen, but today we got no new hints on this.
It would appear that the ECB is taking a very gradual path to the normalisation of monetary policy. The EUR has suffered as a result of this.
Initial Market Reaction
The initial reaction is one of disappointment that the ECB did not make the slightly hawkish shift:
- German Bund yields have fallen (10yr yield has fallen -5 basis points)
- The EUR has also fallen (EUR/USD -40 pips, EUR/GBP -15 pips)
- The German DAX has been supported, rallying by c. +20 ticks
And going forward…?
Broadly speaking, this ECB decision has firmed up the resistance on EURXXX crosses. EUR/USD reaction to 1.0940/1.0960 is the key near to medium term reaction now and this decision has only served to strengthen the resistance.
The ECB remains on the dovish end of the spectrum as the FOMC accelerates towards a far more hawkish positioning. This will maintain the bias of EUR underperformance.