ECB’s Cœuré talks about what yield curves are saying

Excerpts from a speech by Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Financial Times European Financial Forum “Building a New Future for International Financial Services”, Dublin, 31 January 2018.

Markets seem sanguine about the prospects for the US, and probably also for the global, economy. Judging from the average expected short-term rate over the next ten years, the markets appear to have shaken off some of the pessimism that caused them to tread very carefully over the past few years. Past and currently expected policy rate changes are predicted to last. This also means that the flattening of the US yield curve is unlikely to signal a looming recession, as it may have done in previous business cycles.

Current financial market conditions have given rise to much comment. Concerns have been voiced that low long-term yields are a precursor to economic slowdown or recession. These concerns, however, are inconsistent with the marked rise in expected future short-term rates in some jurisdictions and the parallel increase in stock prices in many others. We currently see no concrete evidence of market uncertainty about the sustainability of the current economic expansion.

We do see evidence, however, suggesting that market participants globally consider upside risks to future inflation to be limited at present. While this might be a natural corollary of the protracted period of low inflation, it may also be a matter of concern if it indicates complacency over future adjustments. However, we see no such risks in the euro area today. Accordingly, an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up, and we expect the ECB’s key interest rates to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.

Read the full speech

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