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New ECB Framework Shows Rate Hikes Not on the Cards

Northern Trust Asset Management Monthly Market Commentary for July 2021 - Exclusive Insight for TMI Subscribers

Eurozone Market Update

At its monetary policy meeting, the European Central Bank left its main policy measures unchanged and reiterated their expectations that purchases under the Pandemic Emergency Purchase Programme over the current quarter will be at a significantly higher pace than at the start of the year, based on financing conditions and the inflation outlook. Importantly, adjustments to the wording of the forward guidance, to align with the new symmetric 2% inflation target, introduced three key criteria for hiking rates: 1) inflation reaches 2%, 2) inflation stays durably above 2% of forecast horizon, and 3) inflation stabilises at 2% over the medium-term. In the long-term, forecasts indicate that inflation will remain well below 2% (see Chart of the month), which indicates that rate hikes are a long way off.

UK Market Update

With no Bank of England (BofE) Monetary Policy Committee (MPC) meeting, the market focused on speeches from MPC members. Initially, hawkish comments by BofE's Dave Ramsden and Michael Saunders resulted in a short sterling selloff. However, the following week, comments by more dovish committee members Jonathan Haskel, Ben Broadbent and new member Catherine Mann reversed these moves, as they see high inflation subsiding. The current BofE stance is based on the labour market and with the furlough scheme winding up in September it is likely they would have to wait until February 2022 to assess the unemployment level before acting. We will see whether the hawkish comments turn into anything more at the next meeting.

US Market Update

As expected, there were no monetary policy changes at July's Federal Open Market Committee meeting, but market consensus was that it began the process of teeing up tapering. On the "substantial further progress" criteria required for commencing tapering, the post-meeting statement noted that "…the economy has made progress towards these goals…" However, Federal Reserve Chair Jerome Powell acknowledged that there remains further to go. He also indicated that Fed policymakers had carried out a "first deep dive" into how tapering might be carried out, but noted that divisions remain. Powell essentially re-emphasised what we already knew: Current inflation strength isn't enough by itself to tighten monetary policy and they will closely watch employment data before they act.