Aegon AM: Dovish reaction of markets to ECB decision

Aegon AM: Dovish reaction of markets to ECB decision

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Marcel van Zuilen, Senior Portfolio Manager at Aegon Asset Management, comments on the results of the ECB monetary policy meeting:

"Today the ECB has decided to keep its interest rates unchanged. The main refinancing operations rate (the repo rate) was kept at 0%, the marginal lending facility at 0.25% and - most importantly - the deposit facility, stays at -0.5%. It’s most important because it currently acts as the marginal official rate due to the massive amount of liquidity in the euro system.

Moreover, the ECB has decided not to change anything on the Pandemic Emergency Purchasing Programme (PEPP). With this program the ECB buys government bonds so that the member states of the Euro zone are better able to finance their own stimulus programs. The program will run until at least March 2022, but can be tapered before that if financing conditions become ‘more favourable’. So the ECB can continue this program before the EU rescue programs are completely on track, which is expected to be at the end of this year / first quarter next year, so that coincides nicely.

The ECB does not seem to be worried about inflation being too high. Although Eurozone inflation over May reached the 2% level the ECB is targeting, they’ve repeatedly stated they wouldn’t mind overshooting for a shorter period of time, to compensate for the past years in which inflation was far below this level. They see the current higher inflation as ‘transitory’, so it will come back to levels below the 2% mark.

Their projections of annual inflation are at 1.9% in 2021, 1.5% in 2022 and 1.4% in 2023. The growth risk in the Euro area are seen as broadly balanced (first time since December 2018 they say so) and GDP growth is projected at 4.6% in 2021, 4.7% in 2022 and 2.1% in 2023.”

Furthermore, Van Zuilen discusses the reaction of the markets on the decision:

“Another aim of the ECB is to not surprise the market and create volatility. Although market expectations were broadly in line with the two main decisions; the market reaction was a bit dovish. Initially, the 10 year German yield went up 2 base points but one hour after the meeting it was back to the same levels we saw this morning.

Taking into account the 5% inflation print in the US (where 4.7% was expected), and yields going down, we conclude that the market considers inflation to be ‘transitory’ as well. Periphery spreads tightened after the meeting. The spread between Italian and German 10 year bonds went down by 3 basis points. The continuation of the PEPP program is clearly seen as supportive for the European bond markets.”