The big change in the last month is the clear signals that the ECB is ready to provide some kind of inflation given their concerns with a stronger exchange rate and the prospect of persistently low inflation.
ECB Governor Draghi gave a very strong signal that it was prepared to act at in June, and has given several speeches outlining the risks surrounding a period of
ultra-low inflation.
The big question is what kind of easing does the ECB plan on implementing? Purchasing sovereign bonds is not a legally viable option under their current mandate, with the members of the governing council having raised the prospect of purchasing other kinds of covered bonds.
The prospect of negative interest rates has also been floated. This wouldn't be a first, with Denmark experimenting with negative rates in the last 12-18 months, although this isn't something that has been tried by any of the larger central banks.
It also runs into the problem of bank's switching deposits into cash, which has some storage costs but would be cheaper than holding an account with the ECB.
To me it seems unlikely that the ECB would go for a relatively untried policy measure like negative interest rates and are more likely to announce some kind of bond buying program along with lowering the main refi rate to zero. It may also provide stronger guidance to match what has been done by other central banks.
Key to the ECB strategy will be to ensure markets aren't disappointed, as one of the key objectives will be to try and shift momentum on the Euro. The fact that the real Euro has been stubbornly strong has been a central concern to the ECB and the inflation profile.
Elsewhere, central banks are largely maintaining the course set at the start of the year. The Fed is likely to continue with tapering asset purchases despite a likely downgrade to 2014 GDP expectations and more caution around housing markets. But with 10 year treasuries dropping below 2.5% in the last month or so, it seems the market is doing a good enough job of easing monetary conditions without the Fed having to change course.
The Bank of Japan has maintained its aggressive stance, with more recent information on activity suggesting growth had slowed following the rise in the VAT. Interestingly, Governor Kuroda has started to make more noise about about the rise in the Yen and slower pace of reform from the Abe government. This has traditionally been off limits from BoJ Governors.
The Bank of England released its inflation report, with gelled with the consensus that the bank rate will start to rise slowly in 2015. Whether bank rate hikes come earlier will depend on the pace of improvement in labour markets and wages. If wages start to rise a little more quickly in the second half of the year, it seems likely that the bank rate will rise earlier. This is a legitimate risk given labour markets have improved much fast than the Bank previously envisioned.
