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12 Jul 2013
Flash: Near-term risks to European rates remain balanced – Goldman Sachs
FXstreet.com (New York) - The ECB has just started to pre-commit to low interest rates for an extended period, with more explicit guidance from Governing Council member Asmussen that means rates will not rise for at least 12 months, suggests the Economics Research Team at Goldman Sachs.
This is a new, more dovish communication strategy aimed at reversing a tightening in monetary policy linked to the Fed-induced global rates sell-off. Moreover, the ECB remains a strict inflation-targeting Central Bank, and its own growth and inflation forecasts make it highly unlikely that the ECB will hike any time soon. Indeed, the ECB has been discussing a possible rate cut for some time, as President Draghi has indicated at recent press conferences. On the other hand the data over the last few months points to a modest rebound in inflation and economic stabilization in the periphery – both make a rate cut at the margin less likely.
“In line with this assessment, expectations for ECB policy have therefore not moved much and 2-year swap rates in the Euro area remain close to the average that has prevailed year to date. That said, the recent decline in EUR/USD and subsequent rebound coincided with local changes in rate differentials. Overall, the near-term risks to European rates seem balanced relative to market expectations.” the team adds.
This is a new, more dovish communication strategy aimed at reversing a tightening in monetary policy linked to the Fed-induced global rates sell-off. Moreover, the ECB remains a strict inflation-targeting Central Bank, and its own growth and inflation forecasts make it highly unlikely that the ECB will hike any time soon. Indeed, the ECB has been discussing a possible rate cut for some time, as President Draghi has indicated at recent press conferences. On the other hand the data over the last few months points to a modest rebound in inflation and economic stabilization in the periphery – both make a rate cut at the margin less likely.
“In line with this assessment, expectations for ECB policy have therefore not moved much and 2-year swap rates in the Euro area remain close to the average that has prevailed year to date. That said, the recent decline in EUR/USD and subsequent rebound coincided with local changes in rate differentials. Overall, the near-term risks to European rates seem balanced relative to market expectations.” the team adds.