Strategy & economics

ECB surprises with decisive outlook: rates to remain unchanged until late 2019

European Central Bank is now unlikely to increase rates until September 2019

15/06/2018

Janet Mui

Janet Mui

Global Economist

The European Central Bank’s latest guidance on interest rates was surprisingly clear. Unless economic conditions change drastically, interest rates will remain where they are until the third quarter of 2019.

Any increase is unlikely before next summer, it indicated. The earliest meeting date after “summer” would be September 2019.

The unanimity of the message, delivered on Thursday June 14, was largely unexpected, and caused the euro to fall 1.4% against the dollar by the time of writing.

The ECB’s stance on quantitative easing (QE) was equally direct. The ECB will reduce its QE from €30 billion per month to €15 billion at the end of September this year. It plans to stop the programme altogether by the end of December, it said, in line with market expectation.

The decisive stance on QE was based on confidence in the persistence of solid economic activity. This comes despite the ECB’s acknowledging that growth is slowing from its 2017 peak and the pick-up in political uncertainty in Italy.

Growth was revised down in 2018 due to weak performance in the first quarter, and inflation was revised up to reflect the pick-up in oil prices. While the ECB expects inflation to rise gradually, it anticipates that it will remain at or around 1.7% over the forecast horizon.

ECB macroeconomic projections

 

June 2018

March 2018

 

2017

2018

2019

2020

2017

2018

2019

2020

Real GDP growth

2.5

2.1

1.9

1.7

2.5

2.4

1.9

1.7

Inflation (HICP )

1.5

1.7

1.7

1.7

1.5

1.4

1.4

1.7

Source: ECB

 

And in the US…

The tone of the Federal Open Market Committee (FOMC) was more positive, acknowledging a flow of stronger data and inflation. It noted an improving global picture with rising consumer confidence and business investment. A stronger labour market was clearly viewed as supportive.

The FOMC marginally increased its 2018 forecasts for growth and inflation. It now anticipates two further rate increases for this year and three for next (thus ending overall 25 basis points higher than outlined at its previous meeting) with no change for 2020 or beyond.

Chair Powell described the government’s fiscal boost as meaningful in terms of lifting demand and increasing productivity. The committee see limited impact arising from controversial trade policies.

Chair Powell’s announcement that from January 2019 the FOMC will have a press conference after every meeting seems, at the margin, somewhat hawkish. He did stress that the move “signals nothing”, but historically rates have tended to move in meetings that have been followed by a press conference. The change means every meeting from January will be potentially “live”.

Market expectations are still well below those of the FOMC for rate progressions into 2019 and 2020. It is likely that markets view that the Fed may find it hard to raise rates on as many occasions as planned when financial conditions tighten and activity cools.

Author

Janet Mui

Janet Mui

Global Economist

Janet is an Economist working in the Investment Strategy Team and a CFA charterholder. She joined in 2011 and previously worked in Citi Hong Kong as an analyst in Global Portfolio Management and subsequently as a relationship manager to multi-national clients. Janet graduated with a BSc in Economics from the London School of Economics (first class honours), holds an MBA in Finance from the University of Cambridge and obtained a Postgraduate Certificate in Econometrics from Birkbeck College, University of London.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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