Eurozone:
• ECB asking for patience
• Inflation expectations recovering
• Lending survey indicating rising loan demand
At last week’s meeting, the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council (GC) continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.
Regarding non-standard monetary policy measures, the GC confirmed that it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of 80 bn EUR until March 2017 and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of 60 bn EUR until the end of December 2017, or beyond, if necessary, and in any case until the GC sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the GC stands ready to increase the programme in terms of size and/or duration.
The statement says that headline inflation has increased lately, largely owing to base effects in energy prices, but underlying inflation pressures remain subdued. The GC will continue to look through changes in headline inflation if judged to be transient and to have no implication for the medium-term outlook for price stability. There are no signs yet of a convincing upward trend in underlying inflation. Looking ahead, on the basis of current oil futures prices, headline inflation is likely to pick up further in the near term, largely reflecting movements in the annual rate of change in energy prices. However, measures of underlying inflation are expected to rise more gradually over the medium term, supported by the monetary policy measures, the expected economic recovery and the corresponding gradual absorption of slack.
When asked about the rise in the inflation rate during the press conference, President Draghi reiterated that for the inflation objective of the ECB to be met, four conditions have to be satisfied:
1. The objective is defined over the medium-term horizon.
2. There has to be durable convergence towards the inflation goal, so it cannot be transient.
3. It has to be self-sustained. It has to “stay there even when the extraordinary monetary policy support that we are providing today will not be there”, in Draghi’s words.
4. It has to be defined for the whole of the Eurozone.
It was also mentioned that the outlook for headline inflation over the next quarter or two maybe is higher (due to the aforementioned energy price base effects) than it was foreseen in the previous macroeconomic projections (as of December). The fourth point can likely be read as addressing concerns about monetary policy in Germany and recently escalating German critic was repeatedly addressed during the conference. Answering these critics, Draghi said that “low rates are necessary now to get higher rates in the future.” He also said that the recovery of all of the Eurozone is in the interest of everybody, including Germany. “The German savers have benefitted, not only as savers but also as borrowers, as entrepreneurs, as workers – like all the other citizens of the Eurozone.” President Draghi asked for patience.
With respect to “tapering”, Mr. Draghi reiterated that it was not discussed in the council meeting in December and it was not discussed in the GC meeting last week.
The Q1 2017 Survey of Professional Forecasters (SPF), that is conducted on a quarterly basis by the ECB, revealed last week, that inflation expectations have been revised up to 1.4 % (+0.2 %-points), 1.5 % (plus 0.1 %-points and to 1.6 % (unchanged) in 2017, 2018 and 2019. Long-term inflation expectations remained unchanged at 1.8 %, according to the survey, and only gradually below the average number (1.9 %) since the survey was initiated and, hence, relatively well anchored around the inflation target of the central bank (as compared to market inflation expectations in Figure 1). The return of market inflation expectations (5-year forward 5-year inflation swaps) in the direction of the central bank’s inflation target should be encouraging from its view.
According to the January bank lending survey (BLS), loan growth continued to be supported by increasing demand across all loan categories, while credit standards for loans to enterprises are broadly stabilizing.
In Q4 2016, credit standards for loans to enterprises tightened somewhat in net terms, driven mainly by developments in the Netherlands. This was the first net tightening since Q3 2013. Credit standards on loans to households for house purchase remained broadly unchanged, while credit standards on consumer credit and other lending to households continued to ease.
Banks’ lower willingness to tolerate risk was the main factor contributing to the slight net tightening of credit standards on loans to enterprises in Q4. For housing loans, competition and risk perceptions had an easing impact on credit standards, while banks’ risk tolerance had a small net tightening impact.
The net easing of banks’ overall terms and conditions on new loans continued across all loan categories, was mainly driven by a further narrowing of margins on average loans. The net percentage of rejected applications decreased for all loan categories.
Since the 2011/12 Euro-crisis bank lending rates have decreased considerably in Western Europe’s periphery. Since 2011, interest rates on bank loans to non-financial corporates (maturity over one and up to five years, new business) have fallen from a peak at 5.4 % to 1.3 % in November in Italy, from 7.5 % to 2.1 % in Spain and from a peak at 7.9 % to 3.1 % in Portugal. Accordingly, real (inflation-adjusted) bank lending rates have fallen in the periphery heavyweights Italy and Spain, but also in Germany (Figure 2). Theoretically, the real rate of interest determines firms’ financing and investment decision among other factors like business prospects. In principle, firms would be expected to invest as long as the marginal revenue of capital exceeds its extra cost (the real interest rate) of capital.
The medium-term decline in real interest rates might be attributable and is intended by the ultra-expansionary monetary policy of the ECB in order to incentive firms’ capital investment and thereby have positive effects on real activity in the economy. These effects have recently been documented in prominent academic literature. However, a recent study by the Bank of International Settlements (BIS) called into question the real economic effects of unconventional US Fed policies in the aftermath of the 2008/09 financial crisis in a simple econometric framework.
Net demand for loans to enterprises continued to increase and banks expected it to increase further in Q1 2017. In addition, net demand for housing loans, as well as for consumer credit, increased considerably. The low general level of interest rates, merger and acquisition activity and debt refinancing remained the main contributing factors to net demand for loans to enterprises. By contrast, the positive contribution from fixed investment remained very small, whereas that from inventories and working capital was more significant. Net demand for housing loans was driven by the low general level of interest rates, continued favourable housing market prospects and consumer confidence.
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
Disclaimer
This publication is neither a marketing document nor a financial analysis. It merely contains information on general economic data. Despite thorough research and the use of reliable data sources, we cannot be held responsible for the completeness, correctness, currentness or accuracy of the data provided in this publication.
Our analyses are based on public Information, which we consider to be reliable. However, we cannot provide a guarantee that the information is complete or accurate. We reserve the right to change our stated opinion at any time and without prior notice. The provided information in the present publication is not to be understood or used as a recommendation to purchase or sell a financial instrument or alternatively as an invitation to propose an offer. This publication should only be used for information purposes. It cannot replace a bespoke advisory service to an investor based on his / her individual circumstances such as risk appetite, knowledge and experience with financial instruments, investment targets and financial status. The present publication contains short-term market forecasts. Past performance is not a reliable indication for future performance.
Imprint
Information required pursuant to the Austrian Media Act
Publisher of this publication:
UNIQA Insurance Group AG
Untere Donaustraße 21, A-1029 Vienna, Austria
Media owner of this publication:
UNIQA Capital Markets GmbH
Untere Donaustraße 21, A-1029 Vienna, Austria
Management Board of UNIQA Capital Markets GmbH:
Mr. Arnd Muenker, Dr. Andreas Bertl, Mr. Franz Hagmann
UNIQA Capital Markets GmbH is constituted as a limited liability company; the media owner is licenced as an investment firm and regulated by the Austrian Financial Market Authority (FMA-Finanzmarktaufsicht).
Ownership structure of the media owner:
UNIQA Insurance Group AG is 100% owner of UNIQA Capital Markets GmbH.
Basic tendency of the content of this publication:
Information on general economic data.