Global Daily – Central banks closer to removing stimulus

by: Nick Kounis , Aline Schuiling

In this publication:
Central Bank View: Carney hints at rate hike, ECB on track for slow exit. Euro Macro: Bank lending strengthens

170628-Global-Daily.pdf (200 KB)

Central Bank View: Carney hints at rate hike, ECB on track for slow exit

Following ECB President Draghi’s less dovish remarks on Tuesday (see here), BoE Governor Carney followed today with a clear shift in tone. While Mr Carney previous played down the need to raise interest rates, on Wednesday, the message was very different. He said that ‘some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional’. The Governor’s remarks mean that an imminent rate hike has become a much more likely prospect and we are reviewing our scenario that it will keep its monetary policy on hold in the coming months. Although both headline and core CPI inflation are running above target (CPI: 2.9% in May, Core CPI at 2.6%), we think there are good reasons for caution. First, the rise in inflation is due to the fall in sterling and will therefore eventually reverse. Second, economic growth is slowing. Finally, there are downside risks related to Brexit. Meanwhile, Bloomberg reported that ECB officials (which asked not to be named) were trying to cool down the market’s hawkish interpretation of Mr Draghi’s speech. They asserted that the market misinterpreted his remarks. We disagree, as there was a very clear shift in tone. We continue to expect the ECB to taper asset purchases from early next year onwards. (Nick Kounis)

Euro Macro: Bank lending strengthens

The ECB’s report about monetary developments in the eurozone showed that growth in bank lending is strengthening. The flow of loans (adjusted for sales and securitization) to eurozone households increased to EUR 18bn in May, up from EUR 11bn in April. Loans to non-financial companies rose by EUR 10bn in May, slightly lower than the EUR 11bn recorded in April, but well above the average flow during the past twelve months. Annual growth in loans to households jumped to 2.6%, up from 2.4% in April, while that of loans to companies stabilised at 2.4%. Within loans to companies, the share of long-term loans (maturity of 5 years or more) has been creeping higher since the start of the year, which seems to suggest that more loans are related to fixed investment decisions. We expect bank lending growth to accelerate in the coming quarters. It tends to follow changes in nominal GDP growth with a considerable delay and the pick-up in growth in the past few quarters will probably support bank lending in the coming quarters. Moreover, the low level of interest rates and the expectation that rates will probably rise in the coming quarters, as the ECB is gradually moving towards the tapering of its asset purchases, could support bank lending further.   (Aline Schuiling)