Daily Insight
Group Economics Macro & Financial Markets Research
22 March 2016
Further ECB easing Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
We think further ECB monetary easing is on the cards …
… given weak growth and the prospect for inflation undershooting the goal
Further ECB stimulus will likely take the shape of more QE
Meanwhile, eurozone consumer confidence fell further in March
The ECB is not done yet We continue to think that the ECB will ease monetary policy further in the coming months. Admittedly the central bank announced a broad-based and significant package of measures earlier this month. However, it may not be enough to get inflation sustainably all the way back to the goal over the next few years. According to the ECB’s own forecasts, inflation will be only 1.6% even at the very end of 2018. It is hoping the March package closes the gap, but the euro has strengthened since and generating significant domestic inflationary pressures is a very slow process. Wage growth and core inflation remain weak and economic growth has lost momentum. Focus shifting to QE rather than rate cuts We had expected big things from the ECB in March (including QE, rate cuts and new longterm favourable loans for banks) given the extent of the deterioration of the inflation outlook and it did deliver. However, we thought the Governing Council would cut the deposit rate more significantly than it did and leave the door open for more rate reductions. Instead, the ECB cut the deposit rate relatively modestly and seemed to rule out further aggressive cuts, saying it would rely on other instruments. We therefore no longer expect any further deposit rate cuts, meaning we see the current rate of -0.4% as the bottom. We previously expected a low of -0.7%. A euro surge could still trigger another rate cut but not our base case Although we do not completely rule out further rate reductions, we think a sharp further rise in the euro would be needed to trigger this. Such a scenario could occur due to Brexit (which would lead to a sterling slump) or due to additional dovish shifts in expectations about the Fed or BoJ.
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2
Daily Insight – Further ECB easing - 22 March 2016
Increase and extension of QE Rather than rate cuts, we think further monetary easing will take the form of additional QE. We expect an increase in the monthly purchase total by another EUR 20bn taking it to EUR 100bn. In addition, we expect the end date to be extended to June 2017, from March 2017 currently. This will probably not be announced before September, given the ECB may want to first implement and see some early results from the measures it announced in March. Eurozone consumer confidence drops again Meanwhile, turning to economic data, the European Commission’s consumer sentiment indicator fell further in March. It dropped to -9.7 from -8.8 in February, marking the third consecutive monthly drop. The indicator is still at decent levels, but the recent decline does point to only moderate consumer spending growth (see chart). For much of last year, consumer spending had been the main pillar of the lackluster economic recovery.
Eurozone consumer confidence and spending % qoq
Balance
0.6
0
0.4
-5
0.2
-10
0.0
-15
-0.2
-20
-0.4
-25
-0.6
-30
-0.8
-35 08
09
10
11
Private consumption (lhs)
12
13
14
15
16
Consumer sentiment (rhs)
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
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Daily Insight – Further ECB easing - 22 March 2016
Day
Date
Time
Country
Key Economic Indicators and Events
Monday Monday Monday Monday Monday
21/03/2016 21/03/2016 21/03/2016 21/03/2016 21/03/2016
08:45:00 09:15:00 10:30:00 15:00:00 17:40:00
EC US EC US US
ECB's Coeure speaks in Paris Fed's Lacker speaks in Paris ECB's Constancio speaks in London Existing home sales - % mom Fed's Lockhart speaks on US economy
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
22/03/2016 22/03/2016 22/03/2016 22/03/2016 22/03/2016 22/03/2016
10:00:00 10:30:00 11:00:00 14:00:00 14:00:00 18:30:00
DE GB DE US HU US
Ifo - business climate - index CPI - % yoy ZEW index (expectation economic growth) FHFA house price index - % mom Base rate -% Fed's Evans speaks in Chicago
Wednesday Wednesday Wednesday
23/03/2016 23/03/2016 23/03/2016
00:00:00
EC US US
ECB's Weidmann speaks in Liechtenstein New homes sold - % mom Fed's Harker speaks in New York
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
24/03/2016 24/03/2016 24/03/2016 24/03/2016 24/03/2016 24/03/2016 24/03/2016 24/03/2016
10:00:00 10:00:00 10:00:00 10:30:00 13:00:00 13:15:00 13:30:00 14:45:00
EC EC EC GB TR US US US
PMI manufacturing - index PMI services - index Composite PMI output Retail sales - % mom Repo rate - % Fed's Bullard speaks in New York New durable goods orders - % mom Markit - Flash PMI
Friday Friday
25/03/2016 25/03/2016
00:30:00 13:30:00
JP US
CPI - % yoy GDP - % qoq annualised
Period
Latest outcome
Consensus
ABN AMRO
Feb Feb
-7
-2 -2
-1.0 -1.0
Mar Feb Mar Jan Mar 22
105.7 0.3 1.0 0.4 1.35
105.9 0.3 5.2 0.5 1.35
106.1
Feb
-9.2
2.1
3.0
Mar P Mar P Mar P Feb Mar 24
51.2 53.3 53.0 2 7.5
51.4 53.5 53.2 -1 7.5
51.2 53.2 53.0
Feb P Mar P
4.7 51.3
-2.0
Feb 4Q T
0.0 1.0
0.3 1.0
10.0 0.5 1.35
7.5
1.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
Find out more about Group Economics at: https://insights.abnamro.nl/en/
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