- Central banks from Scandinavia and Switzerland are facing the spill overs from the ECB…
- … they will be forced to step up monetary easing to prevent currency appreciation and lowflation
- US retail sales disappoint but we remain convinced that consumer demand will strengthen
ECB forces its policy on other central banks
Other central banks in Europe have reacted forcefully to the ECB’s upcoming large-scale QE programme. Most of them face similar challenges: far below target inflation and a strengthening currency versus the euro, which will intensify disinflationary forces. As a result, they are being forced to increasingly step up monetary easing to avoid the negative side-effects of the ECB’s turn to bazookanomics.
The Riksbank goes negative
Yesterday, the Swedish central bank cut the repo rate to -0.1% and also announced a small-scale QE programme. It plans to buy SEK 10bn government bonds. The action seems to have been bigger than expected as the EUR/SEK rallied by more than 1.5% and Scandinavian government bond yields moved sharply lower. For example, the yield on a 10yr Danish government bond is now less than -1%. It is likely that the Riksbank will ease monetary policy more aggressively going forward. This will keep the Swedish krona under pressure.
Danish central bank already negative
Last week, the Danish central bank further reduced interest rates and intervened in FX markets to defend the EUR/DKK peg. Denmark’s FX reserves as a percentage of GDP are relatively low (see graph) . However, they are rising at an increasing high pace. In January FX reserves increased by around 26% month-on-month from 446bn DKK to 564DKK. This is a massive increase. It is unlikely that Danish central bank will keep up this pace of increases. So it needs to find other ways to make its currency less attractive such as more interest rate reductions and/or quantitative easing.
SNB could also move to QE eventually
Last month, the Swiss National Bank judged that further increasing its balance sheet – already at unsustainable levels – would pose serious risks. Instead it preferred to allow the Swiss franc to rise, and tempering this with more negative interest rates. FX reserves to be released on 6 March may reveal that the SNB continued to intervene in February, but at a slower pace than before. The SNB may need to cut rates further into negative territory or engage in QE eventually to fight against deflationary risks. Over time such a strategy should dampen the Swiss franc.
US retail sales disappoint,…
January’s US retail sales released yesterday declined by 0.8% following a 0.9% drop in December, mainly reflecting falling gasoline prices. Gasoline prices have fallen by almost 40% since the summer. Meanwhile, core retail sales, which are more closely related to the consumer spending component of GDP rose by 0.1% in January after a 0.3% fall the previous month. Building materials and electronics gave a boost to retail sales last month. Other components including vehicle sales and furniture weakened. Both components could be seeing some payback from strong sales late last year. Indeed consumer spending surged in the fourth quarter, expanding at an annual rate of 4.3%. This was the highest since the recession. On top of this some bad weather in Massachusetts could have contributed to some extent to this disappointing data.
…but positive economic outlook to trigger stronger consumption growth ahead
Lower energy prices are expected to boost household disposable income. The impact on disposable income considering the 40% decline in gasoline prices is expected to be around USD 170bn in 2015 , which is around 1% of GDP. It would be odd that given the positive economic outlook and the strengthening labour market if households would only use these gains to pay down debt or increase their savings. We expect consumption growth to pick up noticeably in the coming time.
