| Towards a hike in the UK - October bfinance rates and FX consensus |
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| 01/10/2006 | |
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For the analysts pooled by bfinance, it's a done deal: the next ECB Council members, to be held in Paris, will close with a rate hike leaving the refi rate at 3.25%. "In light of the recent statements by ECB Council members, anything but a rate hike at the next meeting would be a surprise," writes Michael Schubert at Commerzbank. "ECB officials have repeatedly emphasized their 'strong vigilance', which during the last few quarters has been a very reliable signal for a rate hike at the next meeting." While the entire consensus forecast a quarter-point hike in October, the six-month view is not as clear. All the analysts see a further 25 bp hike in December following the October meeting. What will follow those two hikes falls into a greyer zone. There are already some banks seeing further tightening. That's the view of banks such as CNCA, Merrill Lynch and UBS, which remain the minority. One thing is sure: inflation will be the main driver of the ECB's decisions, says Eric Vergnaud at BNP Paribas: "Beyond September, when favourable comparison bases for energy and tobacco should help drive total inflation below 2%, we expect inflation rapidly to move above this threshold, with core inflation catching up with it in early 2007. We are looking for the refi to be taken to 3.50%, after two 25bp hikes on 5 October and 7 December 2006." US While everything points toward the continuation of the tightening cycle in Europe, it's the other way- round for the US. That's what has been interpreted by our analysts, who bank on the status quo at three months following the FOMC's decision to maintain the Fed funds rate at 5.25% at its meeting held on 20 September. Overall, there seems to be a downward trend in the making – if this is the case, then the Fed funds would descend to 5% by March 2007. Nevertheless, there is still much hesitation with some economists forecasting a 50bp cut, and other seeing a 25bp hike. "We see the next US interest rate move as being a reduction," comments Paul Donovan at UBS. "The Fed statement acknowledged a faster pace of slowdown in the housing market, and we believe that this will drive lower consumer spending, lower inflation, prompting lower rates." As the inflation threat seems to wind down, this picture is also becoming clearer for Eric Vergnaud at BNP Paribas, who forecasts that the FOMC will likely initiate its monetary accommodation policy in December with a first quarter point cut. "Indeed, inflation is expected to abate in the next months, even as early as September for total inflation (as a result of the drop in petrol prices and a very favourable comparison basis due to the impact of hurricane Katrina on petrol prices last year). While core inflation is still on an upward path, it is also expected to wind down early next year." All, however, does not align with this trimming scenario. That's the case at Lehman Brothers, whose analyst Ethan Harris says: "The market expects the Fed to cut rate in the coming quarters. However, by stimulating the economy, the drop in oil prices makes Fed rate cuts even more unlikely." UK The Bank of England's Monetary Policy Committee decided unanimously to keep its repo rate unchanged at 4.75% at its meeting held on September 6 and 7, but remains concerned about the re-emergence of inflationary tensions in the economy. For Andrew McLaughlin at the Royal Bank of Scotland, the minutes' revelation that UK interest rates are still considered to be low enough to encourage credit growth and economic expansion points toward an upcoming hike. And the MPC's worries are now supported by a piece of data that has just been published. "The money supply increased by 13.7% in August, lifting it above the sixteen-year high growth rate recorded in June. In theory, this could presage higher inflation in the medium term, because it suggests there is too much money chasing too few goods." "The Minutes suggest that the majority of the MPC members have a bias to hike," agrees Raymond Van der Putten at BNP Paribas. "At the time of revision of its scenario in November, the MPC might want to tighten the screws on short-term interest rates another notch." The consensus is in line with this view: at six months, the repo rate is expected to be at 5%. |
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