The European Central Bank is set to keep its very dovish stance largely unchanged when meets on June 10. We expect the ECB will leave its
deposit rate at -0.50% and may only reduce its pace of quantitative easing marginally from EUR80 billion a month of bond buying.
Source: Bank of Singapore, Bloomberg
The ECB is likely to remain dovish despite the boom as Europe reopens from the pandemic. The first chart shows the Eurozone’s purchasing
manager index (PMI) - a key measure of sentiment - hit three-year highs of 56.9 in May, closely following the UK’s surge. The next chart
shows confidence is near two-decade highs with German IFO business sentiment also rising fast, and the last chart shows Eurozone inflation has hit the ECB’s 2% goal for the first time in three years.
Source: Bank of Singapore, Bloomberg
The ECB, however, isn’t likely to repeat its mistake after the 2008 financial crisis when it raised interest rates prematurely in 2011 as inflation recovered, worsening the Eurozone debt crisis.
Source: Bank of Singapore, Bloomberg
Instead, the ECB is set to keep its deposit rate at -0.50% as it sees increases in inflation this year being only temporary. For example, May’s headline inflation rate hit 2.0% but excluding food and energy, core inflation was just 0.9%. We think the ECB may marginally reduce its pace of quantitative easing in June - having pledged in March to ‘significantly’ raise bond buying - given the Eurozone’s upcoming boom. But its overall monetary stance is likely to remain very dovish to the benefit of Europe’s risk assets.
