ECB Watch - March 2018

ECB Watch

AIB Treasury Economic Research Unit

8th March 2018

ECB removes its easing bias

Today's meeting of the ECB Governing Council

saw no changes to monetary policy, but the

% 5

Central Bank did drop its easing bias that it could

increase the size of its monthly asset purchases. 4

Rates were left at ?0.4% for the deposit rate and

0% for the re rate. Meantime, the ECB's monthly 3

asset purchases were also left unchanged, having 2

been cut from 60bn to 30bn per month at the

start of the year. The QE programme is still 1 scheduled to run until at least September.

ECB Refi Rate (%)

Thus, the ECB has removed its easing bias in relation to its QE programme. While asset

0 Mar-02

Mar-04

Mar-06

Mar-08

Mar-10

Mar-12

Mar-14 Mar-16 Mar-18

Source: Thomson Datastream

purchases will continue "until the end of September 2018, or beyond, if necessary", the ECB is no longer

indicating that the programme could increase in size. The expectation is that the ECB will cease net asset

purchases later this year.

In his press conference today, President Draghi

played down the signi cance of today's move to

% 5

drop its easing bias. He also indicated that there 4

was not much discussion within the Governing

Council about other possible changes.

3

Eurozone HICP Inflation (%, YoY)

Headline

The ECB is still taking a cautious approach to 2

tightening policy. President Draghi once again

1

emphasised that the ECB expects to keep interest

Core

rates at their current very low levels well past the 0

end of net asset purchases. This suggests that interest rates in the Eurozone are unlikely to start to be hiked until 2019. This is re ected in futures

-1 Feb-08

Feb-10

Feb-12

Feb-14

Feb-16

Feb-18

Source: Thomson Datastream

contracts, with markets seeing unchanged rates in 2018 and anticipating that 3-month Eurozone rates will

remain negative until around end Q3 2019. They see rates staying low for an extended period beyond that, only

reaching 1% at the end of 2021.

The reason for the cautious approach to monetary tightening is the expectation that in ation will remain below

the ECB's 2% target over the next couple of years, as evidenced in the latest set of ECB sta economic forecasts.

HICP in ation is forecast at 1.4% in both 2018 and 2019 and 1.7% in 2020, little changed from last

ECB Macroeconomic Forecasts for the Euro Area

December's forecasts. President Draghi noted that (%) underlying measures of in ation remain "subdued".

2017

2018

2019

2020

Meanwhile, the ECB's growth forecasts were HICP

1.5

1.4

1.4

1.7

upgraded slightly for 2018, with GDP now forecast to rise by 2.4% this year. It continues to anticipate growth of 1.9% in 2019 and 1.7% in 2020.

Real GDP

2.3

2.4

1.9

1.7

Forecasts are mid-point of a range and based on assumption that Brent crude oil prices will average $65 in 2018, $61.2 in 2019 and $58.3 in 2020.

The reaction in markets to today's ECB meeting Source: ECB March 2018

was muted enough. The euro rose very brie y,

before settling down to its pre-meeting levels, while there was no lasting impact on bond or interest rate markets.

The subdued reaction of markets to the dropping of its easing bias by the ECB may re ect the fact that they had

no expectation that the QE programme would be increased in size. Today's move then is largely symbolic

especially with markets anticipating that net asset purchases will cease later this year.

Oliver Mangan Chief Economist oliver.n.mangan@aib.ie

John Fahey Senior Economist john.j.fahey@aib.ie



Dara Turnbull Economist

dara.c.turnbull@aib.ie

Eurozone growth continues at pace

The Eurozone economy continued to perform very well in Q4, growing by 0.6% quarter-onquarter. This meant that the economy grew by 2.3% in 2017, matching growth in the US and representing the currency bloc's best annual performance since 2007.

The breakdown of Q4 GDP showed that a exports remained the main driver of growth. Overall net trade added 0.4 percentage points (p.p.) to GDP in Q4, following on from 0.5 p.p. in Q3. Investment added 0.2 p.p., while consumption and government spending each added 0.1 p.p. Inventories were a 0.2 p.p. drag.

%

Eurozone GDP and Composite PMI

1.0

60

0.8

58

GDP (%, QoQ) [LHS]

0.6

56

0.4

54

0.2

52

0.0

50

-0.2

48

Composite PMI [RHS]

-0.4

46

-0.6 Q1 2011

Q1 2012

Q1 2013

Q1 2014

Q1 2015

44 Q1 2016 Q1 2017 Q1 2018

Source: Thomson Datastream

This strong economic performance has resulted in encouraging labour market developments. The Eurozone unemployment rate continues to decline, ending Q4 at 8.6%, down from 9.6% in the same month of 2016. The unemployment rate held at this 10-year low in January this year. An important factor in the more recent decline in unemployment has been the improved performance in France, the Eurozone's second largest economy, with unemployment there falling to 9% in December/January from 9.6% as recently as August.

While Eurozone employment gures for Q4 are %

not due for another few weeks, national level 13

data suggest the jobs market continued to expand at a healthy pace in the quarter. 12

Furthermore, the Eurozone composite employment PMI averaged a strong 55.5 in Q4, 11

its best performance since Q3 2000. It also 10

averaged 55.5 in the rst two months of 2018.

Thus, the signs from the labour market remain 9 very promising.

Eurozone Unemployment Rate (%)

In terms of the broader `headline' PMI gures for Q1 2018, the key composite index averaged

8 Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16 Jan-17 Jan-18

Source: Thomson Datastream

58 in Jan/Feb, improving on Q4 2017's already very strong 57.2 average. Similarly, the EC measure of

Eurozone economic sentiment averaged 114.5 in Jan/Feb, broadly in line with Q4's 114.3 print. Both indices

suggest that the Eurozone economy continued to grow at a strong pace at the start of 2018. This view is also

supported by national indicators such as the German Ifo, French INSEE and Italian ISTAT indices.

There have been limited `hard' Eurozone data for 2018 out so far. Indeed, this week's retail sales release for January was the rst major update in this regard. Sales were broadly at on the month, though year-on-year growth did pick up to 2.3%, from an upwardly revised 2.1% in December. As in other major economies, sales have been volatile in recent months as the end November `Black Friday' sales alter `traditional' sales patterns.

Overall, the economic prospects for the Eurozone look brighter now than at any time in the past decade. The IMF is forecasting GDP growth of 2.2% in 2018 and 2% in 2019. Today's ECB forecasts are broadly similar. Positive factors including the likelihood that ECB policy will remain loose for some time yet, generally more expansionary scal policy and stronger momentum in the global economy should help to underpin growth in the economy. In ation is also likely to remain low, helping to maintain growth in real spending power. The European Commission has noted that given the Eurozone recovery is less advanced than in many other major economies, the currency bloc has the capacity to continue to grow strongly for quite some time.

Nonetheless, the Eurozone economy still faces challenges, including marked regional disparities in unemployment including very high youth unemployment in some countries, a need to boost productivity growth, low wage growth and a continuing aversion to structural reforms in some countries. The outcome of the election in Italy (hung parliament, strong anti-establishment vote) also poses some uncertainty.

AIB Treasury Economic Research Unit

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