Macro Weekly
Group Economics
9 September 2016
Has the ECB lost faith in QE? Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
• • • • • • •
ECB keeps policy unchanged despite low inflation outlook… …it still sees positive effects of QE though effectiveness is diminishing Calls for governments to act seem futile… …while ECB policy regime change looks unlikely A technology shock would save the day but short of that… … we are stuck in a low growth, low inflation, low interest rate world …making the eurozone vulnerable to the next economic shock
ECB keeps policy unchanged despite low inflation outlook The ECB kept its monetary policy completely unchanged despite continuing to predict that inflation will undershoot its goal and admitting that the lack of a rise in underlying inflationary pressure was a ‘concern’ (for more detail please see our note ECB Watch – ECB disappoints, but will act soon). This raises a number of questions. Has the ECB lost its faith in QE? Is QE doing more harm than good? Should the ECB adopt another strategy completely? Draghi talks up impact of ECB policy Listening to ECB President Mario Draghi one would think QE (and the central bank’s other unconventional policies) were the best thing to happen to the world since the discovery of electricity. He made a number of claims about the positive effects these policies were having. They had led to lower interest rates on loans and credit was now growing. In addition, the ‘fragmentation’ in the eurozone – with sharply different credit conditions in different countries – was ‘over’. Mr Draghi even had some estimates of how well the policies have worked. Over the period 2016-2018, the ECB estimates that monetary policy will boost economic growth by a cumulative 0.6% and inflation by 0.4%. Though maybe actions speak louder than words Well that begs the question if the policy works so well, why not do more of it to get economic growth and inflation up? Does the ECB’s inaction suggest that it does not really believe in this story? Well the answer to that question is not black and white. The ECB often moves slowly because of the need to gain consensus in the Governing Council. Indeed, it signalled in the press conference that it was moving towards a further easing of monetary policy later in the year. Indeed, Draghi’s assertion that the Council had tasked committees to look into the options seems to be designed to buy some time to build a shared view of what to do.
Insights.abnamro.nl/en
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Macro Week kly – Has the ECB lost faith in n QE? – 9 Septtember 2016
On the e other hand, it does seem that the ECB is reluctant to seriously step p up its monettary easing fro om here. A very large easing package or ‘bazooka’ doe es not seem on the e cards. Rathe er, we think an n extension of the time horizzon of the prog gramme (from March to Septtember 2017) and options to increase thee pool of assets it can buy se eem more like ely. This would d represent a relatively r cautiious policy res sponse. It could be argued tha at given the ec conomy is not exactly collappsing that a more aggres ssive responsse is not neces ssary. Howeve er, it probably also reflects a sense of the lim mits of the policcy as well. Dimin nishing return ns to QE Thoug gh difficult to e estimate the prrecise impact, it does seem m likely that the e ECB’s policie es have had a positive effec ct. However, it also seems thhat the policie es will be less efffective going forward, at least under the current designn. QE seems to work best when w asset pri ces are at dep pressed levels s. In that case , asset purcha ases can have a big impact in n pushing dow wn bond yields s, and supportting assets suc ch as equitie es. This leads to a major ea asing of financial conditions,, while the signalling effect also boosts co onfidence. Th he Fed’s first QE Q programmee in early 2009 9 was a good example e of thiis. However, iff asset prices are elevated aand bond yield ds are at record d lows, QE beccomes like try ying to get juice out of an alrready squeeze ed lemon. You ca an get some, but it become es more difficult and you gett less juice for your efforts s. Limits s to negative rates There are also limitss to the ECB’s s current nega ative rate policcy. As in the ca ase of QE, negatiive rates have e helped to bring down bank k lending ratess. However, th he danger is that be ecause bankss cannot adjus st deposit rates s as much, theere will be a profit squee eze. This has n not happened yet on an agg gregate level ((the so-called net interest rate margin m of bankks is still stable e). However, th he deeper neggative rates go o, and, or, the lon nger they stayy negative, the e more likely banks will feel the pain. This s could have advers se effects on tthe cost and availability a of lo oans. So ove erall, it looks a as if the ECB’s s policy has had a positive eeffect, howeve er there are limits going g forward . That may be e a contributing g factor to thee ECB’s cautio on. So Mr Dragh hi still seems to o be a believe er, but maybe some doubts aare creeping in i about how aggressive the e policies shou uld be going fo orward. A new w strategy forr the ECB? Low in nflation and low w growth may y be unsatisfac ctory but are nnot a disaster. However, the pro oblem is that tthe current situation means that the eurozzone is very vulnerable v in case of o shocks. In 2 2008, when the financial cris sis hit the eco nomy, core inflation was in line with the ECB B’s price stabiliity goal (just below 2%) andd the ECB’s ke ey policy rate was w at around 4 4%. Now core e inflation is att 0.8% and thee key policy ra ate is -0.4%. A new w shock could leave the euro ozone heading g for deflation without much h it could do about it. Of course tthe ECB will be b creative in an a emergencyy, and could lo ook to buy other assets a such a as equities or even e unsecure ed bank bondss. However, th here are also risks to these o options and lim mitations to the e impact they will have.
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Macro Week kly – Has the ECB lost faith in n QE? – 9 Septtember 2016
So a new n pre-emptiive strategy is needed. The ECB seems w well aware of this t but seems s to be putting g the onus on governments g to act. It has bbecome increa asingly vocal in calling for g governments to implement structural s reforrms. These wo ould raise the ec conomy’s long -term growth potential, help ping to counterract some of the t effects of age eing. It would a also then lead to a higher ‘n neutral’ or equ ilibrium interest rate. It has also started to ccall for govern nments to incre ease infrastruccture investment, which would essentially ha ave the same effect (if properly targeted).. These calls are a obviou usly sensible. However, not very realistic.. Mr Draghi annd his colleagu ues may as well be e talking to a b brick wall. That means m the weiight of achieving economic objectives rem main with the ECB. E Monettary policy obvviously has lim mitations. In ca annot raise thee eurozone’s long-term growth h potential. Ho owever, a new w policy framew work could givve the ECB more room for ma anoeuvre in th e future. A hig gher inflation target for instaance would als so raise the long-ru un neutral inte erest rate in no ominal terms. The trouble iss that raising the t inflation target would only wo ork if it is cred dible. Companies, householdds and investo ors would need to t believe thatt the ECB could achieve the e higher targett even though it is not meetin ng its current llower one. To have a chanc ce to make it ccredible, the ECB E would need to t be able to p promise fresh aggressive monetary stimuulus backed up p by fiscal policy. This does no ot seem likely. In any case, the ECB doess not seem anywhere close to considering g a regime cha ange in terms of its policy fra ramework. Hopin ng for a gift frrom heaven When people are in n a desperate situation s they often hope thaat something falls in their lap fro om the heaven ns. Such as a lottery win. Th he economic eequivalent for macro policym makers would d be a new tec chnology shock, which lifts tthe economy’s s long-term potenttial. Well let’s keep our finge ers crossed! But B short of thaat, it seems we are stuck in a low growth, low w inflation, low interest world d, making us vvulnerable to the next econo omic shock.
Ma ain economic c/financial forrecasts GDP P grow th (%)
2014
2015
2016e
2017e
Unitted States
2.4
2.6
1.5
1.9
United States
Euro ozone
1.1
1.9
1.5 ↑
1.3
Eurozo one
-0.1
Japan
3M interbank rate
0 01/09/2016 08/09/20 016
+3M
2016e
+12M
0.84
0 0.85
0.8
0.80
1.20
1.4
-0.30
-0 0.30
-0.35
-0.35
-0.35
-0.35
-0.1
-0.10
-0.10
-0.1
0.40
0.3
0.6
0.6
0.7
Japan
0.06
0 0.06
Unitted Kingdom
3.1
2.2 ↑
1.9 ↑
1.3
United Kingdom
0.38
↑ 0 0.38
Chin na
7.3
6.9
6.5
6.0
2.9 ↑
0.4 ↑
0.40 ↑
2017e
3.4
3.2
Inflation (%)
2014
2015
2016e
2017e
+3M
2016e
+12M
2017e
Unitted States
1.6
0.1
1.4
1.9
US Treasury
1.57
1 1.62
1.6
1.60
1.70
1.8
Euro ozone
0.4
0.0
0.3
1.5
German n Bund
-0.07
-0 0.06
-0.2
-0.20
-0.10
0.1
Japan
2.7
0.8
0.0
1.0
Euro sw w ap rate
0.28
0 0.32
0.4
0.35
0.55
0.6
Unitted Kingdom
1.5
0.0
0.5
2.3
Japane ese gov. bonds
-0.05
-0 0.05
-0.2
-0.30
0.20
0.0
Chin na
2.0
1.4
2.0
2.0
UK giltss
0.67
0 0.76
0.6
0.50
0.50
0.2
Worrld
3.5
2.9
3.1
3.2
Key y policy rate
08/09/2016
+3M
2016e
2017e
0 01/09/2016 08/09/20 016
+3M
2016e
+12M
2017e
Fed deral Reserve
0.50
0.50
0.75
1.25
EUR/US SD
1.12
1 1.13
1.10
1.10
1.10
1.10
Euro opean Central Bank
-0.40
-0.40
-0.40
-0.40
USD/JP PY
103.2
10 02.5
100.0
103.0
105.0
Ban nk of Japan
-0.10
-0.30
-0.30
-0.30
GBP/US SD
1.33
1 1.33
1.27 ↑
1.33 ↑
Worrld
3.2 10Y intterest rate
Curren ncies
0 01/09/2016 08/09/20 016
110
1.35 ↑
1.40
Ban nk of England
0.25 ↑
0.25 ↑
0.25
0.25
EUR/GB BP
0.84
↓ 0 0.85
0.83 ↓
0.83 ↓
0.81 ↓
0.79
Peo ople's Bank of China
4.35
4.35
4.10
3.85
USD/CN NY
6.68
6 6.66
6.70
6.80
6.90
7.00
Sou urce: Thomson Reutters Datastream, AB BN AMRO Group Ec onomics.
Ma ain economic//financial forrecasts
4
Macro Week kly – Has the ECB lost faith in n QE? – 9 Septtember 2016
Day Monday M M Monday M Monday
Datte 12/09/2 2016 12/09/2 2016 12/09/2 2016
Time 14:05:00 19:00:00 19:15:00
Period
Latest ou utcome
Consensu us
Tuesday T T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday T Tuesday
13/09/2 2016 13/09/2 2016 13/09/2 2016 13/09/2 2016 13/09/2 2016 13/09/2 2016 13/09/2 2016 13/09/2 2016
04:00:00 04:00:00 04:00:00 08:00:00 10:30:00 11:00:00 11:00:00 12:00:00
CN CN CN DE GB DE EC US
Industria al production - % yoy Retail sa ales - % yoy Fixed inv vestment - % yoy CPI - % yoy y CPI - % yoy y ZEW index (expectation econ nomic growth) ment - % qoq Employm NFIB sm all business optimis sme - index
Aug Aug Aug Aug F Aug Sep Q2 Aug
6.0 0 10.2 2 8.1 1 0.4 4 0.6 6 0.5 5 0.3 3 94.6 6
6.2 10.2 7.9 0.4 0.7 2.2
We ednesday We ednesday We ednesday We ednesday
14/09/2 2016 14/09/2 2016 14/09/2 2016 14/09/2 2016
06:30:00 10:30:00 10:30:00 11:00:00
JP GB GB EC
al production - % mom Industria Change in claimant count - th housands ent rate - % Claimant count unemployme al production - % mom Industria
Jul F Aug Aug Jul
0.0 0 -8.6 6 2.2 2 0.6 6
Thursday T T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday T Thursday
15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016 15/09/2 2016
07:30:00
14:30:00 15:15:00 16:00:00
NE CH CH CH GB EC GB GB US US US US US US US US
Unemplo oyment rate SNB 3-m month ibor upper targ get SNB 3-m month ibor lower target SNB Sight Deposit Interest ra ate ales - % mom Retail sa Core inflation - % yoy Policy ratte - % BoE size e of asset purchase programme p - GBP bn b Initial job bless claims - thous ands Philadelp phia Fed - business confidence - index Prod. prices index excl food and a energy - % mom m Prod. prices index - % mom ales - % mom Retail sa Empire State S PMI - Manuf. ge eneral business con nditions - index Industria al production - % mom Busines s inventories - % mo om
Aug Sep 15 Sep 15 Sep 15 Aug Aug F Sep 15 Sep Sep 10 Sep Aug Aug Aug Sep Aug Jul
6.0 0 -0.3 3 -1 -0.8 8 1.4 4 0.8 8 0.25 5 435 5 259 .0 0 2.0 -0.3 3 -0.4 4 0.0 0 -4.2 2 0.7 7 0.2 2
Friday Friday Friday Friday Friday Friday
16/09/2 2016 16/09/2 2016 16/09/2 2016 16/09/2 2016 16/09/2 2016 16/09/2 2016
12:30:00 14:30:00 14:30:00 14:30:00 16:00:00 14:30:00
RU US US US US US
Key rate % y - % mom Inflation excl food and energy y - % yoy Inflation excl food and energy Inflation (CPI) - % mom M cons. confidence - index Univ. of Michigan Inflation (CPI) - % yoy
Sep 16 Aug Aug Aug Sep P Aug
11 1 0.1 2.2 2 0.0 0 89.8 8 0.8 8
09:30:00 09:30:00 10:30:00 11:00:00 13:00:00 13:00:00 14:30:00 14:30:00 14:30:00 14:30:00
Country Key Economic Indicators and Eve ents US Fed's Lockhart Atlanta ashkari, economy and TBTF US Fed's Ka US Fed's Bra ainard Chicago
ABN AMRO
10.0 0.4
94.9
-1.3 2.2 -0.7
-1.3 6.0
-0.3 0.8 0.25 435
0.25 435
0.7 0.1 0.0 -0.1 -0.4 -0.2 0.1 10 0.2 2.3 0.1 90.9 1.0
Sou urce: Bloomb erg, Re euters, ABN AMRO Group G Economics (we e provide own foreca asts only for selected d key variab les and events) FOM M C (v) vo ting; (nv) no n vo tin ng
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