The BoE comment on its monetary policy suggests that a rate hike is a possibility at the August meeting as activity is expected to rise. BUT, the momentum is low and even if there is an improvement it will not catch up what has been lost in 2017.
The graph shows the GDP deviation from trend in the UK, EA, France and Germany. The UK was not able to catch the strong EA momentum in 2017 and its internal dynamics was not enough to support growth. Therefore what’s happening at Threadneedle Street? Wishful thinking?
The ECB has dramatically changed its monetary policy. The Asset Purchase Programme (APP) will stop next December. The amount that will be bought by the ECB will be halved after September to EUR 15bn.
The ECB will continue to invest the proceeds of its portfolio. It will guarantee the liquidity of the market and maintaining rates at a low level.
The ECB said that rates will not increase before the end of summer 2019.
The Fed has raised its main rate by a quarter-point. It is now in the range of 1.75-2%. Explanations are the strength of the business cycle and inflation close to the Fed’s target. Projections still suggest two rate increases in 2018, 3 in 2019 and 1 in 2020.
This is consistent with my forecasts but will lead to a flattening of the curve and therefore a higher probability of a recession in 2020.
Wait and see attitude of the #ECB in the management of its monetary policy. This is a sequel of the cyclical inflection observed since the beginning of the year. Is it permanent or temporary? The answer to this question is essential but it is still discussed by economists.
The ECB does not show a strong will to quickly change its strategy. That’s why we should not be surprised if asset purchases continue beyond the date of September 2018. The central bank is supposed to stop buying assets if the inflation trajectory is consistent with the monetary authorities’ expectations. This will probably not be the case. Moreover, by not creating the idea of a rapid break, the ECB should allow the euro to depreciate against the greenback. This would have a stabilizing effect on the eurozone economic outlook. This is all the more likely as the Fed will be much more active in countering the destabilizing effects of Donald Trump’s fiscal policy.
Economists said after the referendum on Brexit that a temporary spike in the inflation rate could be expected due notably to the British currency depreciation.
That’s what has happened with a peak in November 2017 at 3.1%. After this date, the inflation rate is receding at less than 2.5% in March 2018. The core inflation rate has followed the same profile with a current rate at less than 2.3%.
Central bankers are very attentive to the unemployment rate even if it is for different reasons. In the US, Janet Yellen’s main target was the unemployment rate and she drove the USA economy to full employment at the end of her mandate. Mario Draghi doesn’t focus too much on the unemployment rate during his press conferences. But when we look at low inflation pressures in a Phillips curve we can anticipate that the equilibrium unemployment rate is lower than what we previously thought. It will have to be lower than now to generate inflation pressures.
The comparison of the US and EA unemployment rates is amazing as they follow the same post recession trend Continue reading
The Federal Reserve has increased its main interest rate by 25 basis points. The corridor for the fed fund’s rate is now [1.5 – 1.75%] versus [1.25 – 1.50%] since December 13, 2017. The dots graph which represents FOMC members’ expectations of the fed fund suggests that the US central bank will hike its rate 3 times in 2018 (already one is done), 3 times in 2019 but only twice in 2020. The rate’s profile contained in the dots graph is unchanged even if growth expectations are stronger according to these same FOMC members.