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PIG TODAY-ECB UPDATE: Account of the monetary policy meeting

Review of financial, economic and monetary developments and policy options

Financial market developments

Mr Cœuré reviewed the latest financial market developments.

Since the Governing Council’s previous monetary policy meeting on 18-19 January 2017, two key developments had taken place. First, financial markets had significantly repriced monetary policy expectations in the United States. Second, events in the euro area had impacted both the short and the long end of the yield curve.

In the United States, financial markets had significantly repriced expectations of an interest rate hike by the Federal Open Market Committee (FOMC) in March 2017. The probability of a March hike, as implied by the Fed funds futures market on 8 March, stood at 96%, compared with 15% at the time of the Governing Council’s January monetary policy meeting. As a consequence, market expectations of the future path of US rates had moved closer towards the forecasts of the median of FOMC members for 2017, which predicted three hikes in 2017, while longer-term rate expectations were largely unchanged. Separately, on the fiscal side, market participants had scaled down their expectations regarding stimulus from the new US Administration’s fiscal measures and appeared rather to be in a wait-and-see mode.

Turning to the euro area, since the Governing Council’s previous monetary policy meeting, the aggregate synthetic euro area yield curve for central government bonds and the yield curve for AAA-rated central government bonds had evolved differently. The former had steepened due to an increase in yields at the long end of the curve, whereas the short end of the curve was broadly unchanged. The latter had steepened due to a decrease at the short end, whereas the increase at the long end had been more muted.

Mr Cœuré highlighted some of the factors driving these developments.

Read more: ecb.europa.eu

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