Eurozone
• No change in ECB stance of monetary policy in July.
• Autumn policy meetings will guide through very slow and gradual normalization path.
At the meeting that took place last Thursday, the governing council (GC) of the ECB left the stance of monetary policy unchanged. The statement to the decision was unchanged compared to the June meeting. It stated that the main refinancing rate and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.0 %, 0.25 % and -0.40 %, respectively. The GC expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.
Regarding unconventional monetary policy measures, the GC confirmed that the net asset purchases (“QE”), at the current monthly pace of 60 bn EUR, are intended to run until 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. 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. Hence, the GC did not change the forward-looking phrases (“forward guidance”) of the policy statement.
With regards to inflation, the introductory remarks of last Thursday’s press conference stated that the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with the ECB’s inflation aim. However, it has yet to translate into stronger inflation dynamics. Measures of underlying inflation remain at subdued levels. Hence, President Draghi said “a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium-term.” During the Q&A session, he reiterated that “we need to be persistent, patient and prudent.”
There are two channels that economists theoretically have in mind and through which ‘underlying’ inflation could build up: First, through tightening conditions in the labor market. When unemployment rates fall and it gets more difficult for firms to find and hire additional workers, they will be willing to offer jobs at higher wages. The collective bargaining power of worker’s unions and social partners rises in setting sectoral or national wage agreements. Second, though the goods markets. In theory, perfect competition would force firms to be pure price takers in their markets. Firms that supply their goods above the market price would drop out of the markets since consumer would buy products from competitors. On the other side, firms that supply below the market price would drop out of the market since they would not be any more able to cover their costs. However, in the real world, not all firms face perfect competition in their markets. Imperfect competition allows some firms to set prices at a mark-up relative to the market price (theorists refer to “price setting à la Calvo” after a paper written by Guillermo Calvo in 1983 and built into standard macroeconomic models ). So, once demand firms up and economic slack diminishes – as currently in the Euro Area, some firms will be able to raise their goods prices still being able to find buyers of their product. And how would wage bargainers and producers set wages and mark-ups? They would have in mind the inflation rate or likely an expectation about the future inflation rate.
According to the ECB, risks surrounding the Euro Area growth outlook are broadly balanced. 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 ECB stands ready to increase the asset purchase programme in terms of size and/or duration. The GC also expects that underlying inflation in the Euro Area will rise only gradually over the medium-term, supported by its monetary policy measures, the continuing economic expansion and the corresponding gradual absorption of economic slack.
The ECB will release updated quarterly macroeconomic projections in September. Based on the updated outlook, the GC will likely guide us through the future policy normalization path; in particular, the size and duration of the asset purchase programme. Previously, in June, the staff had revised downward its inflation projections until 2019. The forecast for the Eurozone core inflation rate (2018: 1.4 % and 2019: 1.7 %) remained below the inflation target of the central bank (Figure 1).
In addition, the ECB’s quarterly Survey of Professional Forecasters (SPF) was released last week. The results showed downward revisions of 0.1 percentage points in inflation for all three projection years 2017-2019 (2017: 1.5 %, 2018: 1.4 %, 2019: 1.6 %). On the other side, the longer-term inflation expectation among participants in the survey remained unchanged at 1.8 % (Figure 2). In comparison, financial market participants’ longer-term inflation expectations are more volatile and currently at 1.6 %. The inflation expectations underline that the ECB will remain on a path of a very slow and gradual monetary policy normalization.
Russia:
• The recovery is continuing as macroeconomic data improved further in June.
Russia’s industry is recovering as has recently been confirmed be the continuous rise of the manufacturing survey (FSSS) and the purchase manager surveys (PMIs) for the country. In June, industrial production rose by 3.5 % (y/y) after 5.6 % in the previous month (Figure 3).
Moreover, the economic recovery is more and more support by improving demand. Russian consumers were severely hit by the recession in 2015/16 including a sharp fall in real income and restrictive fiscal and monetary policies. In June, real wages increased by 2.9 % following a rise of 2.8 % (y/y) previously. Accordingly, real incomes stagnated after a longer period of falling real income. The developments support higher consumption expenditures. Retail sales rose by 1.2 % annually (after 0.7 % in May). Also, car sales bounced by 15 % on a year earlier.
The inflation rate has continuously been slowing. In June, consumer price inflation was 4.4 %. As inflation approached the newly established inflation target (at 4 %) it paved the way for the Central Bank of Russia’s interest rate cutting cycle. In June, the CBR had lowered the key policy rate by 25 basis points to 9.0 % – the fifth rate cute since mid of last year – and appears set to continue in doing so.
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:
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.