Rate & Forex Consensus - February 2012

The IMF's recent weakening of growth prospects in the euro zone (from 1.1% to -0.5% for 2012) has not reversed the upward trend followed by the single currency since mid January.  For the interest and foreign exchange rate consensus panel, which has again revised its anticipations on the evolution of the euro-dollar downwards, it's only a matter of time. "With regards the fundamentals, the Euro's current strength is incomprehensible and does not play its role of crisis buffer," believes Isabelle Job, economist at Crédit Agricole.  "The problem is that the other industrialised countries, caught in the trap of their debt, have chosen the same towing strategy by exporting with central banks that are sometimes more obliging and prepared to weaken their currency by indirect methods," she adds.  The American economy's buoyancy in the fourth quarter (2.8% at an annualised rhythm) and the maintenance of high growth prospects for 2012 (1.8% according to the IMF) have not prevented the Fed from again postponing the due date of the tightening of its monetary policy by announcing that its guide rate would remain exceptionally low until 2014.  While the institution has fixed itself an inflation target of 2%, it has not closed the door on new quantitative relaxing measures either, notably mentioning its preoccupations with the continuing high level of unemployment.  Confronted with growth at half-mast, the Bank of England could benefit from its meeting on the 8 and 9 February to relaunch its asset buyback programme which currently remains frozen at 275 billion pounds.  The drop in the rate of inflation observed since November is of a kind to favour the implementation of such a decision, especially as the trend should continue throughout the year.

25bp or 50bp?

The weakness in activity in the euro zone also tends to alienate inflationary pressure.  "The output gap will probably increase, limiting pressure on costs and prices," points out Clemente De Lucia, economist at BNP Paribas.  "We are banking on a downturn of total inflation over the whole year.  From 2.7% in December 2011 it should fall short by 2% this summer and subsequently remain stable below this threshold."  In this context, the ECB could quickly take the path of relaxing its guide rates as banks anticipate. However, they remain divided as to the scale of the movement (25bp or 50bp) by the end of April.  In the longer term, expectations are stabilised for the euro zone with Standard & Poor's anticipating a gradual pulling out of its "light recession" in the second half-year and a return to low growth in 2013.  "The major countries will probably open up the way to a return to growth, while the other member countries will record divergent performances," believes Jean-Michel Six, economist at the agency.  The consensus is still banking on a slight tightening of rates of return from ten year German obligations , 16bp by the end of April and 30bp by the end of July in relation to the level of the 2 February (1.85%). 

Credit tightening

Concerning peripheral countries, long rates started to relax after the first three year loan transaction led by the ECB mid December.  For the time being, banks seem more inclined to redirect liquidities to sovereign debt rather than companies.  While Spanish and Italian rates recorded a noticeable drop in the past few weeks, the last quarterly enquiry on ECB credit reveals an appreciable increase in the number of banks having tightened their credit access terms in the fourth quarter.  The greater the number of banks signalling a tougher stance on credit conditions, the more the ECB will likely ease its monetary policy in the coming months," indicates BNP Paribas.  It is already understood that the central bank will launch a second three year financing operation the 29 February.

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