Sustained upturn need not prompt ECB rate hikes

The euro-zone’s impressive upturn looks set to continue apace as reduced political uncertainty, high levels of business confidence, and continued strong policy support allow investment to take off. Growth has also broadened across the region, with labour market reforms having positive effects in the previously weakest economies. Meanwhile, a lack of inflationary pressure has allowed the ECB to maintain a dovish stance and we doubt that interest rates will rise until late 2019. This has all made the economic expansion seem more sustainable and we have upgraded our forecasts to further above the consensus. Elsewhere, Swiss monetary policy will stay ultra-loose for longer and an associated depreciation of the franc should see the recovery resume. By contrast, we expect Sweden and the UK’s central banks to raise interest rates by more than markets assume as their economies surprise on the upside.