Global Daily – Hiking rates back to zero would risk recession

by: Nick Kounis , Tom Kinmonth , Aline Schuiling , Arjen van Dijkhuizen

ECB View: Negative rates are positive for the economy –  Some commentators have made the case for the ECB to move the deposit rate to zero based on the view that negative rates are bad for banks and hence counterproductive. We think these calls are unjustified and expect the ECB to keep interest rates negative for the foreseeable future. We find that the overall impact on the banking system of negative rate policy – which has been reinforced by other policy measures – has been clearly positive so far. Since the deposit rate was cut into negative territory, bank lending has expanded, lending standards have eased and bank profits have improved. Crucially, lower interest rates have supported economic growth more generally, helping to increase bank loan demand and lower provisions for the banking sector. Net interest margins of banks have not deteriorated, although they may come under more pressure over the coming years. Rate hikes in the near future would tighten financial conditions, which would significantly raise the probability of a eurozone recession.  (Nick Kounis, Tom Kinmonth & Aline Schuiling)

China Macro: NPC confirms Beijing aims at stabilisation, adding piecemeal stimulus – At the start of China’s annual National People’s Congress traditionally held in early March, Prime Minister Li Keqiang revealed a growth target of 6.0-6.5% for 2019, compared to ‘around 6.5%’ for 2018. That was in line with our expectation and fits with our growth forecast for 2019 (6.3%, slightly above consensus). The government also confirmed it would continue with targeted easing to stabilise the economy by announcing further cuts in taxes and fees, raise infrastructure investment and support lending to private firms/SMEs. The proposed tax cuts worth CNY 2 trn (around 2% of GDP) are larger than the cuts implemented last year and are primarily coming in the form of VAT cuts for the manufacturing, transport and construction sectors. To support infrastructure investment, the quota for special bonds issuance by local governments will be raised to CNY 2.15 trn, from CNY 1.35 trn last year. Meanwhile, the inflation target was kept at 3% (clearly higher than the latest CPI figure of 1.7% yoy). On the monetary policy front, we expect Beijing to continue with piecemeal easing, while refraining from large-scale stimulus. Beijing is still constrained by longer-term goals, such as stabilising macro leverage and tweaking China’s growth model, to safeguard long-term growth and prevent potential rating downgrades. (Arjen van Dijkhuizen)