USA:
• Fed hikes as expected, statement and projections mostly unchanged to December
In the meeting last week (14th/15th March), the federal open market committee (FOMC) decided to raise the target range of the federal funds rate by 25 basis points to 0.75 % to 1.0 %; for the third time after the hikes in December 2015 and 2016. The FOMC stated that information received since February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Previously, the statement said that business fixed investment has remained soft. Inflation has increased in recent quarters, moving close to the committee’s 2 % longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 %.
The FOMC expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace. Labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 % over the medium term. Near-term risks to the outlook appear roughly balanced and the stance of monetary policy remains accommodative. In January, Fed Chair Yellen had discussed three different Taylor rules to evaluate the appropriateness of monetary policy (Figure 1) and two out of the rules would confirm that monetary policy remains highly accommodative.
The FOMC inserted that it “will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.” The term “symmetric” within this context seems to imply that the FOMC does not have a bias towards letting inflation temporarily “overshoot” relative to the target. The committee expects that economic conditions will evolve in a manner that will (skipped here: “only”) gradual increases in the key rate.
The updated macroeconomic projections were mostly unchanged to the December forecast; at least the median values (Figure 2). The median projection for real GDP growth is 2.1 % in 2017 and 2018, 1.9 % in 2019 and 1.8 % for the longer-run. The unemployment rate is expected at 4.5 % until 2019 and 4.7 % in the longer-run. PCE inflation is expected at 1.9 % this year and to converge to 2 % until next year. The median expectation among Fed board members and Federal Reserve Bank presidents for the fed funds rate was unchanged at 1.4 % for end-2017 implying 2 further rate increases each 25 basis points this year, 2.1 % for 2018 (i. e. 2-3 rate hikes next year) and 3.0 % for 2019 (up from 2.9 % in December) and the longer-run. The central tendency (excluding the three highest and lowest projections) moved slightly higher for this year (from 1.1-1.6 to 1.4-1.6 %), for 2018 (from 1.9-2.6 to 2.1-2.9 %) and for 2019 (from 2.4-3.3 to 2.6-3.3 %).
CEE:
• Inflation rising in Central Europe, as elsewhere
• Czech National Bank presented economic and monetary policy outlook to investors.
Inflation rates have been rising across Central and Eastern Europe (Figure 3). In Poland, the consumer price index rose by 2.2 % (y/y) in February after 1.7 % previously. While the core inflation rate also left deflationary territory, it remained stunningly low (0.3 % y/y) despite solid economy growth, a tight labor market and rising labor cost. Gross wages increased by 3.7 % (y/y) in February and by 4.1 % on average during the last year.
In the Czech Republic, CPI inflation rose by 2.5 % (y/y) in February. Headline inflation will increase into the upper half of the tolerance band around the Czech National Bank’s (CNB) target (2 % +/-1 percentage point) according to the CNB. CPI Inflation is expected to average 2.4 % in 2017 and 2.2 % in 2018. GDP growth is expected at 2.8 % in 2017 and 2018 (after 2.4 % in 2016). Growth will accelerate mainly because of renewed growth in government investment co-financed by EU funds. Also, household consumption will continue to expand solidly.
The Czech National Bank (CNB) says that it will use the exchange rate as a monetary policy instrument until mid-2017. Following the discontinuation of the CNB’s exchange rate commitment, monetary policy will start to shift towards a neutral effect on the economy.
In the CNBs forecast, market interest rates are assumed to stay flat at their current very low level until mid-2017. This reflects the assumption that the 2-week repo rate will be left at technical zero and the money market will remain unchanged in the same period. An increase in the market interest rates in the second half of 2017 is projected, followed by a further modest rise in 2018. The CNB projects the 2-week repo rate at 0.60 % at end-2017 and 1.2 at end-2018. The koruna (CZK) is forecast to appreciate against the Euro in the second half of 2017, and also slightly in 2018 amid a positive interest rate differential against the EUR, the effect of the ECB’s quantitative easing and renewed real convergence of the Czech economy to the advanced Euro Area countries. However, the CNB says that this projection does not take into account possible CNB interventions in the FX market.
Similarly, in Hungary inflation increased to 2.9 % (y/y) in February (after 2.3 % previously). According to the minutes of the monetary council (28th February) of the National Bank of Hungary (NBH), the measures of underlying inflation had remained broadly unchanged. The base effects on the inflation will fade in the spring months and, hence, the consumer price index is likely to decrease again. The members of the monetary council concluded that maintaining the current level of the key policy rate for an extended period and the loosening of monetary conditions by the change in the monetary policy instruments were consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The monetary council would stand ready to ease monetary conditions further using unconventional instruments, if subsequently warranted.
Hence, while the Czech National Bank will likely tighten its monetary policy by abandoning the FX commitment and raising the key policy rate in the second half of the year, the National Bank of Hungary – likely the most unorthodox central bank in CEE – maintains an accommodative bias. It might only make minor adjustments in unconventional instruments (the limit of the deposit rate facility was earlier set at 750 bn HUF) but likely leave the main policy unchanged until at least the end of this year.
Author
Martin Ertl
Chief Economist
UNIQA Capital Markets GmbH
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