- Economists’ forecasts for ECB policy rates beyond Q1 next year lack imagination, for good reason.
- A solid labour market and fiscal stimulus support the ECB’s sustained departure from the zero bound.
- Our new forecasts see a medium-term ECB policy rate at 1.8-to 2.0%, pointing to cuts in H1-2024.
Claus Vistesen (Chief Eurozone Economist)Eurozone
In one line: An early hint of slower rate rises; the ECB is incentivising banks to repay TLTRO III funds.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- We detect no push-back from ECB policymakers against the idea of a 75bp rate hike next month.
- The ECB is clear in its message; higher rates are needed to reduce demand in line with supply.
- Quantitative tightening makes little sense in the EZ, but the discussion has started, all the same.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Bond yields in Germany are rising at their fastest pace this side of reunification.
- The German 2s10s yield curve has collapsed to zero; we think it will invert soon.
- Normally, an inverted yield curve points to a policy mistake by the central bank, but not this time.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- The EZ composite PMI sank further in September, consistent with GDP falling in the third quarter
- Supply-side tensions eased in September, but higher energy costs drove a rise in input price inflation.
- Markets look for the ECB deposit rate to end 2022 at 2.25, with 75bp more in 2023; that's too much.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- The SNB joined the 75bp rate hike club yesterday; it won’t stay there for long.
- We expect a 50bp hike in December, taking the rate to 1.00%, and we think the Bank will pause in 2023.
- Unlike the ECB, the SNB is capping the amount of bank deposits that will benefit from higher rates.
Melanie Debono (Senior Eurozone Economist)Eurozone
- EZ construction output rose slightly in July, but we doubt this is the beginning of a sustained rebound.
- Survey data suggest that construction will weaken further in the third quarter, after a soft Q2.
- Private sector construction will be hit by rising rates; civil engineering should be more resilient.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Our forecasts for ECB rates imply a rise in mortgage rates of over 400bp, raising the risk of defaults.
- Rising mortgage rates will mean house prices will be falling by around 1% year-over-year by end 2023.
- Higher risk is already discouraging banks from lending, but a credit crunch will likely be avoided.
Melanie Debono (Senior Eurozone Economist)Eurozone
- No one knows how the EZ economy will respond to a 250-to-300bp increase in interest rates.
- But the ECB is not necessarily making a policy mistake; the surge in inflation can’t be ignored.
- Sustained fiscal stimulus and a resilient labour market offer hope that the ECB will get away with it.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- The rise in inflation since the SNB’s last meeting means it will surely raise rates on September 22.
- The ECB went big last week; the SNB will follow suit as it seems happy with current franc strength.
- In Q4 we think the SNB will hike by 50bp, much less than the 125bp we expect from the ECB.
Melanie Debono (Senior Eurozone Economist)Eurozone
- The ECB goes big with a 75bp rate hike, and we are inclined to look for another 75bp in October.
- We think the ECB wants to get its main policy rates to 2-to-2.5%, between now and Q1 next year.
- The ECB now sees the EZ economy stalling in H2-22, but rates will continue to increase.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- We look for a 75bp hike from the ECB this week, but the consensus is evenly split between this and 50bp.
- Ms. Lagarde will be asked about the terminal and neutral rates; will she get pinned down on a number?
- Factory orders in Germany fell further in July, and turnover points to a decline in production.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- We now think the ECB will lift rates by 50bp three times this year, but still expect a pause in H1-23.
- Today's EZ inflation data will offer little relief for markets recently stung by hawkish ECB comments.
- Surveyed inflation expectations are falling, in line with the idea of a reduced tightening pace in 2023.
Claus Vistesen (Chief Eurozone Economist)Eurozone
Higher inflation for longer will lead to higher interest rates, which will support banks’ interest margins.
This implies higher profits, which makes bank equities attractive right now.
But risks to the profit outlook remain in the form of windfall taxes and falling demand for loans.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Swiss GDP likely rose by 0.5% in Q2, the same as in Q1, and more or less in line with the EZ aggregate.
- The German recession will weigh on Swiss industry in H2, and consumers’ income is being squeezed.
- We look for GDP growth broadly to stagnate in H2, but the SNB is still likely to hike rates further
Claus Vistesen (Chief Eurozone Economist)Eurozone
