Global Daily – Seriously considering NIRP

by: Nick Kounis , Peter de Bruin

140213-Global-Daily-Insight.pdf ()
  • ECB Executive Board member suggests central bank is moving closer to negative rates
  • Eurozone production points to modest gain in Q4 GDP
  • BoE sharply upgrades GDP forecast and drops unemployment-based guidance
  • US JOLTS labour market survey points to accelerating wage growth

Chance of deposit rate cut in March rises

ECB Executive Board member Benoit Coeure told Reuters that the ECB is “very seriously” considering moving the deposit rate into negative territory. These comments suggest that the ECB is closer to a negative interest rate policy (NIRP) than previously suggested. Indeed, ECB President Draghi has generally said in the past that the central bank is technically ready to go negative and that it was an option, but has not gone further than that. Mr Coeure’s comments are consistent with the view that monetary easing is likely in March. We think that stopping the sterilisation of the SMP is the most likely option, but the chances that the deposit rate will be cut into negative territory instead of, or in addition to, that move have clearly risen. This and weaker than expected eurozone production data (see below) put pressure on the euro.

Eurozone production falls short of expectations

Industrial production in the eurozone declined by 0.7% mom in December, following a 1.6% jump in November. This left production up by 0.3% qoq during 2013Q4 as a whole, up from 0.0% in Q3. This fits in well with our forecast that eurozone GDP expanded by 0.2% qoq in Q4, a touch higher than the 0.1% recorded in Q3 (the number will be published on Friday). Although production and net exports probably contributed positively to growth in Q4, the monthly data for retail sales and new passenger car registrations suggest that private consumption was flat after it expanded by 0.1% qoq in Q3. Meanwhile, data for capital goods orders and producer confidence suggest that fixed investment grew by around the same percentage in Q4 as in Q3 (around 0.5% qoq). Looking forward, we see growth picking up further in 2014Q1 on the back of a strengthening global economy and modest growth in domestic demand. This has already been pre-signalled by strength in business surveys.

BoE Inflation Report points to early 2015 rate hike

Meanwhile, the BoE seriously upgraded its UK GDP forecast for this year (to 3.4% from 2.8%) in its Quarterly Inflation Report. In addition, it admitted that unemployment has fallen much more rapidly than expected. The unemployment rate is likely to reach the MPC’s 7% threshold by the spring of this year. As a result it dropped its guidance based on the unemployment rate and moved to one based more vaguely on broader measures of slack. BoE Governor Carney made a valiant attempt to stress that rate hikes were some way off but given the momentum in the economy, it seems increasingly likely that rates will start to go up early next year. Financial markets had expected that Mr Carney would be more dovish so interest rates rose and sterling rallied. As a result, EUR/GBP reached our quarter end forecast of 0.82.

US JOLT survey points to accelerating wage growth

The JOLT survey is not a headline grabber, but it contains a couple of labour market indicators that Fed Chair Janet Yellen frequently looks at, while it also gives an insight into the amount of labour market slack. In December of last year, the amount of job openings and hires both fell modestly, though the series remain clearly on an upward trend, suggesting that the labour market continues to recover. Indeed, there are signs in the survey that slack in the labour market is disappearing. The number of unemployed per job opening dropped to 2.6 in December, down from 2.7 the month before. This marked the lowest level since August 2008. While the JOLT survey does not have a long history, in the past upswing, the number of unemployed per job opening falling below 2.6 was accompanied by an acceleration in wage growth. As such, we see the JOLT report as providing further evidence that wages are set to rise more strongly during our forecasting horizon.