While we expect the ECB to remain accommodative at next month’s governing council meeting, the debate between hawks and doves is heating up.

Article by Nadia Gharbi & Shamil Suleymanov, Pictet Wealth Management

The driving forces behind the recent rise in European government bond yields have been largely internal. These include the improvement in the economic backdrop fuelled by re-opening and uncertainty around the European Central Bank’s (ECB) reaction function.

Since the ECB meeting in April, financial conditions have tightened, even though the ECB has not clearly defined what it really means by “preserving favourable financing conditions”—probably because there is no consensus within its governing council. The fact that the rise in nominal yields has mainly been driven by breakeven rates (i.e. inflation expectations) rather than real rates might explain the ECB’s tolerance of higher nominal yields but, overall, important question marks have been hanging over the ECB’s intentions.

The ECB committed to “significantly higher pace” of purchases under the auspices of its Pandemic Emergency Purchase Programme last March. Whether it maintains this commitment when it meets in June or instead reduces the pace of purchases remains a close call, although recent comments from the central bank have titled toward the dovish side. But even if the ECB does not deliver a “soft tapering” on June 10, the battle between the hawks and doves will intensify given the improvement in fundamentals. The market will rapidly switch its focus to the central bank’s governing council meetings in July and September.

Ultimately, the ECB’s broader policy stance is the more important issue. Given the subdued medium-term inflation outlook for the euro area, we expect highly accommodative monetary policies to continue even after the recovery is on a firm footing, thus containing the rise in sovereign bond yields. At this stage, we are keeping our year-end target for the German 10-year Bund unchanged at 0.0%.

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Publié le 31 mai 2021