| ECB likely to move again - December bfinance rates and FX consensus |
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| 04/12/2005 | |
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For the first time in over two years, the monetary story of the month was made in Frankfurt. Surprising all the banks in the bfinance consensus, the ECB raised its refi rate by a quarter point. Not a single bank in our consensus had seen the hit coming at three months in November, and only three of them had forecast the rise at six months (HSBC, Natexis BP and Royal Bank of Scotland) – still, however, missing the boat by five months. In turn, all the pooled economists have suddenly become much more bullish in this month's consensus after a remarkably flat period, with no one below the 2.50% line at six months. Merrill Lynch even boldly forecasts a 3% rate at the end of May 2006! Stop or go? If an economist such as Bruno Chevalier at Crédit Agricole expects a target rate of 3.25% at the end of 2006, this opinion is certainly not shared by the economists of the Royal Bank of Scotland. There will be another quarter point hike, say Robert Gardner and Stuart Green, both working at RBS, but that is unlikely to go any further. "[…] Such moves should still be seen as precautionary measures, aimed at keeping inflation expectations stable at a low level, rather than the onset of an aggressive monetary tightening process." According to Mr Gardner and his colleague, headline inflation will begin to fall rapidly in the second half of 2006. Combined with a slow economic growth, that should be enough to discourage the ECB from pursuing a series of hikes. In the end, expect the refi rate at 2.50% in six months time, which is the median average of the consensus. UK status quo Cross over the Channel, and the contrast between the Bank of England and the ECB is striking. It is now the Bank of England, whose Monetary Policy Committee (MPC) left the interest rate unchanged at 4.5% at its last November meeting, that sees no rush to either trim or raise its rates. That shows up in our consensus with a 6-month median average forecast of 4.40%. In the opinion of Gardner and Green, the latest Inflation Report points toward a continuation of this status quo for some time. "We remain unconvinced that lower inflation will deliver the impetus to growth that the MPC expects", they say, adding that one further rate cut might be necessary in early 2006 to prop up the British economy. Upcoming inversion? In the US, except for the upcoming arrival of Ben Bernancke this January, it is business as usual. All the pooled economists say that the Fed will keep on raising its rates through 2006. At end of February 2006, Fed funds will either be at 4.25% or 4.50%, depending on which forecast you look at. But at six months, the more likely scenario favours a 4.50% rate, where the hike cycle could then come to a final halt. The picture for long term rates is somewhat more exciting, with a yield curve inversion in the US now highly likely to crystallise with the continual Fed funds hikes. At six months, US 10y rates are forecast at 4.60 (4.63% at 3 months), dangerously close to Fed fund forecast over the same horizon. On the FX front, the two extremes come from HypoVereinsbank, which expects the €/$ rate at 1.14, and Merrill Lynch, whose upper band forecast puts the €/$ rate at 1.32. The median average moves substantially month to month and now stands at 1.19 at three months, against 1.23 for the previous consensus. The yearly average is also down from 1.28 last month to 1.24 in December. S.L. and J.L.  |
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