Earlier we saw the Bank of England (BoE) and European Central Bank (ECB) hold policy, but both introduced a form of forward guidance.
To wrap up where our central banks are right now:
US Federal Reserve - We have been given thresholds for when action will be taken
UK Bank of England - We have been promised thresholds for when action will be taken
Eurozone European Central Bank - We have been given no clear period for when action will be taken
We've got some reaction to the introduction of these tools:
Kit Juckes, Societie Generale:
Both engineered lower yields and weaker currencies. Transatlantic monetary policy divergence could not be any clearer. The Fed is at the start of a very long drawn-out process of normalisation and the ECB and MPC are both still thinking about easing further and clearly discomforted by the recent back-up in rates.
Mario Draghi's press conference contains much more to chew over than the short MPC statement (it isn't over yet...). The key line in the introduction was 'The Governing Council expects key interest rates to remain at present or lower levels for an extended period of time'. This is new and is overt forward guidance. The Q&A saw an interminable discussion of what extended means, but we'll call it 'a good bit longer than a year' and 18 months seems a fair bet. There is a much better than even chance of another rate cut before we are done.
Joshua Raymond, chief market strategist, City Index:
The meeting today now sets up the next MPC meeting on August 1st as potentially crucial in indentifying how the BoE shapes monetary policy for the remainder of the year, especially given that the BoE will also have the quarterly inflation report to reflect upon before its policy decision.
Whilst expectations are elevated for additional stimulus measures to be announced, the Bank of England will also discuss giving the market ‘forward guidance.’ The updated mandate from the Chancellor to the BoE requested that the bank evaluates the potential for providing forward guidance and intermediate thresholds in its August meeting. The Bank said that this analysis would have an important bearing on the policy discussions in August. This elevates the August meeting as perhaps the most important MPC meeting since July 2012, when the bank voted to increase stimulus by £50bn.”
Howard Archer, chief UK & European economist, IHS Global Insight:
This forward guidance is in stark contrast to the ECB’s repeated past mantra that it never pre-commits on monetary policy, and the move is aimed as a clear antidote to the recent marked rise in Eurozone market interest rates following the US Federal Reserve indicating that it could start tapering its bond purchases later this year.
We think there is every chance that the ECB will eventually take its key policy rate down from 0.50% to 0.25% as we anticipate that the Eurozone will continue to find it very tough to develop clear growth. A failure of Eurozone bond yields to retreat markedly on a sustained basis from recent higher levels would also likely cause the ECB to take its policy rate down to 0.25%.