by While the European Central Bank announced tamer-than-expected quantitative easing measures this month, it also offered a bit of reassurance to those counting on a broader QE program: bank president Mario Draghi said that the ECB was prepared, if necessary, to implement further easing. But is more easing actually likely in the coming year? Credit Suisse believes the answer is “no.” To understand why, it’s important to look at what might have prompted the bank to limit its latest round of easing. The only substantive stimulus measure announced, Credit Suisse analysts say, was a deposit rate cut to -0.3% from -0.2%. Many investors, encouraged by comments from ECB President Mario Draghi last month about the bank being intent to raise inflation “as fast as possible,” had expected more, such as a deeper deposit rate cut. Their disappointment manifested itself in the sharp appreciation of the euro against the dollar and a sell-off in short-duration peripheral bonds after the ECB’s Dec. 3 announcement. But the economic data coming out of Europe in recent months doesn’t support calls for more stimulus. A range of indicators suggest that the continent’s economy is growing above-trend at a pace of 1.5 percent and Credit Suisse says that the prospect for growth in the region in 2016 is as good as it’s been in a decade.
Topics:
Alice Gomstyn considers the following as important: World Affairs: Features
This could be interesting, too:
Alice Gomstyn writes Queen Bee Syndrome, Dethroned
Ashley Kindergan writes Unshakeable Europe
Ashley Kindergan writes US Election: Status Quo vs. Who Knows?
Ashley Kindergan writes A Blueprint for Brazil’s Fiscal Reforms
While the European Central Bank announced tamer-than-expected quantitative easing measures this month, it also offered a bit of reassurance to those counting on a broader QE program: bank president Mario Draghi said that the ECB was prepared, if necessary, to implement further easing. But is more easing actually likely in the coming year? Credit Suisse believes the answer is “no.”
To understand why, it’s important to look at what might have prompted the bank to limit its latest round of easing. The only substantive stimulus measure announced, Credit Suisse analysts say, was a deposit rate cut to -0.3% from -0.2%. Many investors, encouraged by comments from ECB President Mario Draghi last month about the bank being intent to raise inflation “as fast as possible,” had expected more, such as a deeper deposit rate cut. Their disappointment manifested itself in the sharp appreciation of the euro against the dollar and a sell-off in short-duration peripheral bonds after the ECB’s Dec. 3 announcement.
But the economic data coming out of Europe in recent months doesn’t support calls for more stimulus. A range of indicators suggest that the continent’s economy is growing above-trend at a pace of 1.5 percent and Credit Suisse says that the prospect for growth in the region in 2016 is as good as it’s been in a decade. “There has been no downturn for the ECB to urgently offset,” Neville Hill, Head of European Economics at Credit Suisse, wrote in a recent note.
What may have appeared urgent, at least in the eyes of ECB officials, was limiting the short-term weakness of the euro against the dollar, which — its recent slide notwithstanding — is poised to appreciate thanks to the much-anticipated interest rate hike by the U.S. Federal Reserve. The Federal Open Markets Committee announced its first rate hike in more than nine years — a quarter-point increase to a target range of 0.25 to 0.5 percent — at its Dec. 16 meeting. The ECB’s moves “may make lift-off for the Fed…a little easier,” Hill wrote.
What, if anything, would prompt the European Central Bank to step up quantitative easing again? The most likely cause would be low inflation. Headline inflation has teetered at zero this year while core inflation’s upward trend has stalled. The ECB expects inflation to average 1% next year, but a downward trend in core inflation or no rise in headline inflation could prompt the bank to act. The likelihood of either scenario is questionable, however: Credit Suisse suspects that core inflation’s movements are erratic — rather than being indicative of a steady downward trend — while stabilizing energy prices should help push headline inflation up.
There are three potential factors that could prompt more quantitative easing: a significant rise in the euro, a large drop in oil prices or a surprise drop in euro area growth. But without such shocks, the coming year will likely see no new easing by the ECB. In light of the current and anticipated monetary policy divergence between the ECB and the Fed, investors can also expect steeper yield curves in the euro area and a flatter one in the U.S.