In its last monetary policy meeting of the year, the European Central Bank (ECB) kept monetary policy unchanged.
There were no surprises regarding policy or signalling from the Governing Council which was very much as expected given it was only in the last meeting that the ‘recalibration’ of policy was announced.
The staff forecasts announced were a welcome Christmas present for the ECB and the Eurozone as a whole. Economic growth was revised up well above market consensus levels: in 2017 to 2.4%, 2.3% in 2018, 1.9% in 2019 and 1.7% for 2020. This is a very impressive outlook given trend growth is estimated to be around 1.5% each year.
Inflation forecasts though remain low and heavily dependent on prospective oil prices. In 2017 it is estimated to be 1.5%, 1.4% in 2018, 1.5% in 2019 and 1.7% in 2020.
The market reaction was muted. Bond markets have become less sensitive to the growth outlook, focussing on inflation and the level of cash deposit interest rates (still negative in the Eurozone)…a situation that we believe is likely to pertain for some time to come.
Swiss National Bank
The Swiss National Bank (SNB) kept interest rates and monetary policy unchanged today.
Despite recent modest currency depreciation, the National Bank continued to reiterate that the currency remains ‘highly valued’ and thus it remains committed to maintaining its policy of negative interest rates and willingness to intervene in foreign exchange markets as necessary.
Forecasts regarding the economy were also updated. Inflation rates were revised up in 2018 and 2019 to 0.7% and 1.1% respectively. GDP is forecast to increase by 2% in 2018, compared with 1% in 2017.
We expect the SNB to maintain this policy for the foreseeable future, yet at present money market curves are priced to suggest that it will increase interest rates ahead of the European Central Bank. In our opinion this is an extremely unlikely scenario unless the Swiss franc depreciates materially.
This is something we are looking to exploit in our absolute return funds via relative value trades.