Daily Insight
Group Economics Macro & Financial Markets Research
19 July 2016
ECB to remain on hold (for now) Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Central banks: ECB on hold this week - We expect the ECB to remain on hold this Thursday, though we do expect a stepping up of monetary stimulus later in the year. The Governing Council looks set to take a wait-and-see approach for two reasons. To start with, it wants to assess the impact of the monetary stimulus measures it has already announced, including the recently launched TLTRO-II and corporate bond purchase programmes. Furthermore, it wants to gauge the early impact of the UK’s vote to leave the EU. The first consumer and business surveys for July are only just out this week. In addition, the ECB’s staff economists will provide the regular quarterly projections in September. Indeed, the Bank of Spain’s Governor Luis Maria Linde – one of the doves in the council - confirmed recently that the ECB will not have an estimate of the impact of Brexit on the economic outlook until then. Still the direction of travel is clear, and we think additional monetary easing will be necessary. Economic growth was already slowing in Q2 pre-Brexit, and the added uncertainty is likely to keep growth subdued and the added uncertainty will probably lead to weaker investment, keeping economic growth modest. Meanwhile, the ECB already was projecting an undershoot of its inflation target in 2017-2018 in the March forecast round. (Nick Kounis) Central banks (2) - ECB to ease in September - We expect the ECB to step up its QE programme in September (with monthly asset purchases rising to EUR 100bn from EUR 80bn). In addition, it is likely to extend the programme to the end of next year, compared to the soft deadline of March 2017 currently. The ECB will need to also announce measures to expand the eligible universe of public sector bonds in order to meet these targets, in fact it needs to do that even to meet its existing targets. This reflects that the fall in bond yields has meant more and more government bonds have yields below the deposit rate (of -0.4%) making them ineligible. There are three major options to change the programme. First, dropping the deposit rate floor for purchases. Second, increasing the issuer or issue limit. Third, dropping the capital key weights for purchases and moving to a debt weighted-key. We think options 1 or 2 will be deployed (or some combination) rather that option 3, which would be politically more difficult. A debt key would mean that the ECB would buy more Italian and Belgian bonds, while options 1 and 2 would keep the relative amounts of bonds of different countries bought unchanged compared to the current system. (Nick Kounis) Global Macro: Turkey’s failed coup - It is still difficult to forecast the extent of the adverse impact of the failed coup on economic growth in Turkey at this stage, but whatever the impact, global spillovers will likely be limited. Turkey’s GDP grew by 4.8% in Q1 2016, but our forecast for this year was already for a slowdown to 3%. This is based on the assumption that political developments – like the attempts of President Erdogan to establish an executive presidential system – and security concerns, would negatively impact the country’s tourist sector and probably capital inflows as well. Last week we lowered our growth estimate for next year from 3.5% to 3% due to the negative impact of Brexit. The most important economic impact of the recent failed coup is through the impact on confidence and hence on (foreign) investment. Turkey has a large current account deficit. FDI flows cover only a small part of the deficit (35% in 2015), while the lion’s share comes from more volatile portfolio investment. The total inflow of capital rose strongly in the first
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Daily Insight - ECB to remain on hold (for now) - 19 July 2016
five months of the year (USD 15.8 bn, compared to USD 5.2 bn in the first five months of last year), but FDI was down from USD 4.7 bn to a mere USD 2.3 bn. This is why we also see Turkey as one of the countries most vulnerable to a change in investor sentiment due to other possible shocks. (Marijke Zewuster) Global FX: Constructive sentiment after coup fails - On Friday evening in illiquid US trade, the Turkish lira fell sharply, with USD/TRY rising to above 3.05 (or +5.4%) on the news of the attempted coup in Turkey. On Monday, the Turkish lira recovered again reflecting that the coup had failed. This recovery in the lira also supported the currencies of central and eastern European economies and helped investor sentiment in currency markets. The Japanese yen continued to be under some pressure because of better investor sentiment and anticipation of monetary and fiscal easing in Japan. We expect the BoJ to cut the policy rate to -0.3% and to raise the amount of its asset purchases to JPY 100tn on 29 July. In addition, currencies of commodity exporting countries outperformed the US dollar on Monday. Meanwhile, fears of a possible negative spillover of Brexit to the eurozone have diminished. For example the demand for downside protection in EUR/USD has eased to the level seen at the end of May. In addition, the panic state in the sterling FX options markets has completely evaporated. There is still some preference for downside protection in sterling versus US dollar, but this is at relatively normal levels. Hawkish comments by BoE's Weale that firmer evidence is needed for an August rate cut also supported sterling. Going forward, we expect currencies of commodity exporters to remain resilient, but sterling to decline on the back of weaker data, BoE easing and tough and longlasting UK-EU Brexit talks. (Georgette Boele)
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Daily Insight - ECB to remain on hold (for now) - 19 July 2016
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Daily Insight - ECB to remain on hold (for now) - 19 July 2016