Daily Insight Fed closes door for rate hike in June
Group Economics Macro & Financial Markets Research Nick Kounis & Maritza Cabezas + 31 20 343 5616
21 May 2015
Cautiously optimistic FOMC members see June rate hike as too early; September hike still on the cards ECB reported to give Greek banks more room on ELA Japan GDP growth stronger than expected, but inventories played a big role
Minutes show cautiously optimistic FOMC members The FOMC minutes from the April meeting did not make major
Japan GDP growth lifted by build-up in inventories
changes to the view communicated in the corresponding FOMC statement about the outlook for the US economy,
contribution in % 10
unemployment and inflation despite the weak first quarter GDP growth. The minutes reinforced the ‘transitory factors’ affecting
5
the slowdown that were already mentioned in the statement.
0
As such, the forward looking view about the economy was unchanged. The April meeting was before the release of solid
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nonfarm payrolls and housing market data and a disappointing
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retail sales report, which together have been showing a mixed
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start for the second quarter. We expect firmer economic activity in the coming quarters. Rate hike in September still on the cards
-20 Q1 2012
Investment Government consumption Inventories Net exports Private consumption GDP growth Q1 2013
Q1 2014
Q1 2015
Source: Thomson Reuters Datastream
The minutes indicate that participants expressed different views about the likely timing and pace of rate hikes. A June
Japan GDP growth strong, inventory largest contributor
rate hike is unlikely as most participants think that the
First quarter GDP grew at an annualized pace of 2.4% up from
economic conditions in June will still not be right for raising
1.1% the previous quarter. The report showed a steady
rates. We continue to expect a rate hike in September. A lot
contribution of consumption to growth, which was unchanged
will obviously depend on whether the economy recovers
at 0.9 ppts. Meanwhile business investment was for the first
convincingly after the weak first quarter.
time in a year a positive contributor to growth (0.1%). It was, however, the build-up in inventories that lifted the economy
ECB reported to have given Greek banks breathing space
above expectations. Net exports’ contribution was down 0.7
The ECB’s Governing Council had a non-monetary meeting on
ppts. Inventories contributed 2ppts to GDP growth after
Wednesday. Leaks suggested that it had given Greek banks
shaving off 1.1ppts in the fourth quarter. We think the large
more breathing space by giving more room to the Bank of
positive contribution from inventory has negative implications
Greece to provide ELA. Sources reported by Market News
for GDP growth in the second quarter.
International said that Greek banks would be allowed to use EUR 6bn more in collateral for ELA. Meanwhile, sources told
Firmer consumption ahead and monetary stimulus
Bloomberg News that the Bank of Greece had requested an
Recovery in momentum of domestic demand remains weak,
increase in the ELA ceiling of EUR 1.1bn, which would take it
but we expect consumption to support the economy in the
to EUR 81.1bn. This would be the same increase as was
coming time. Indeed, the rise in disposable income resulting
granted last week. This compares to actual borrowing of EUR
from lower oil prices and higher real wages should bring about
74bn. Greek banks have enough collateral to borrow around
firmer consumption growth. We also expect additional
an extra EUR 20bn assuming the ceiling would be allowed to
monetary easing in July, but there are risks that this could be
rise. This means that theoretically, have several more months
announced earlier if the economy does not show more
of room assuming deposit withdrawal does not significantly
meaningful signs of recovery.
quicken. On the other hand, the government is facing a more acute liquidity crunch, and could be facing real difficulties without fresh funds within the next two weeks.