ECB Revises Growth and Inflation Forecasts Higher

Daily Analysis - 15/12/2017

Central Bank President Signals Caution as Inflation Remains Below Target


The latest decision announced by the European Central Bank was absent fireworks as officials opted to leave interest rates unchanged while maintaining their plan to taper asset purchases to €30 billion in January through the end of September. However, highlighting the risks lying ahead, the institution reminded markets that the date and amount of easing were subject to change depending on conditions.

ECB Forecasts Years Until Inflation Target is Met

During their final decision of 2017, the European Central Bank’s Governing Council made no significant changes during Wednesday’s monetary policy statement. Interest rates were kept at 0.00% for the key rate and -0.40% for the deposit rate, matching the consensus estimate of economists. However, 18-straight quarters of growth and improving fundamentals were reflected in the improved growth forecasts for the coming years, with GDP expectations revised higher to 2.40% in 2017, 2.30% in 2018, and 1.90% in 2019. While inflation projections were also adjusted higher for 2018, comments from President Mario Draghi signify that hitting the 2/.00% target remains years away. Furthermore, he cited global factors as the main downside risks, reiterating that interest rates will remain unchanged for a considerable time after quantitative easing is set to end to maintain support for the economy. The Euro fell against most peers following the announcement, with EURJPY extending losses to near 132.250.


Bank of England Faces Rising Inflation

In a widely anticipated move following the first rate hike in over a decade, the Monetary Policy Committee at the Bank of England decided unanimously to leave the benchmark unchanged at 0.50% during its latest decision. An inflation report delivered earlier in the week highlighted the ongoing upward price pressures, upping the stakes for the institution after it forecast that inflation already peaked. However, with inflation continuing to outpace wage gains while potentially weighing on growth, the Bank of England revealed that tightening could be implemented gradually in 2018 to counteract these forces. Though officials believe inflation will gradually retreat to the 2.00% target over the medium-term, the institution warned on the outlook for growth, anticipating more sluggish fourth quarter growth relative to the three months ended in September. Speculation that additional rate hikes were possible was enough to lift the Pound, sending EURGBP back beneath 0.8800.


US Retail Sales Rise for Third Straight Month

In another positive development to accompany recent optimism about the economic outlook, US retail sales managed to outperform expectations across the board. The headline monthly figure increased by 0.80% during the month of November, topping October’s higher revised 0.50% gain. Furthermore, the narrower core figure managed to gain 1.00%, more than doubling the 0.40% reported for a month earlier. The pickup was broad-based, with 11 out of 13 categories displaying growth during the period, helped by the 2.80% increase at gas stations all while reflecting a strong kickoff for the holiday shopping season. The two categories that found themselves under pressure during the period included auto sales which contracted by -0.30% and merchandise retailing which stayed unchanged for the period. Despite reaching a fresh intra-session high, Dow futures ended Thursday’s session below 24600 before rebounding during the Asian session.


Japanese Large Manufacturers Most Confident in 11-Years

Complementing the recent streak of positive data points, a quarterly Tankan survey of manufacturers conducted by the Bank of Japan underscored the resoundingly positive sentiment. The survey pertaining to large manufacturers was particularly upbeat, with the figure climbing to an 11-year high of 25 compared to the prior quarter’s reading of 22. Furthermore, markets are greeting this data optimistically, especially considering labour shortages may contribute to higher wage inflation over time as corporate profitability and the export economy both improve simultaneously. Helping this along is a recently introduced plan by the ruling party to cut corporate taxes as a reward for companies that increase capital expenditures and investment, helping stimulate the broader economy. Nonetheless, inflation remains well below the Bank of Japan’s target, indicating that struggles will lie ahead. Positive data contributed to gains in the Yen, pressuring the USDJPY to just above 112.000.


Upcoming Events

  • Time
  • Currency
  • Event
  • Forecast
  • Previous
  • 10:00 GMT
  • EUR
  • Trade Balance (November)
  • 24.6B
  • 26.4B
  • 13:15 GMT
  • GBP
  • BoE MPC Member Haldane Speaks
  • 13:30 GMT
  • USD
  • NY Empire State Manufacturing Index (December)
  • 18.6
  • 19.4
  • 13:30 GMT
  • CAD
  • Manufacturing Sales MoM (October)
  • 0.80%
  • 0.50%
  • 14:15 GMT
  • USD
  • Industrial Production MoM (November)
  • 0.30%
  • 0.90%

This website uses cookies to ensure best possible user experience. Read more