Even after yesterday’s loosening of monetary policy, the ECB is unlikely to hit its inflation target. The Bank is not yet out of ammunition, but we doubt that further easing would do much good.
ECB has more tools, but they’re blunt
The ECB’s new forecasts imply that it is not very confident about hitting its inflation target. Indeed, its new projections show headline and core inflation at just 1.5% in 2021, which President Draghi described as “well below” its inflation aim. And we think that the Bank’s growth and inflation forecasts are still too optimistic. (See here.) With that in mind, it’s worth looking at what more the Bank could do.
Perhaps the easiest move would be a further cut to the deposit rate. Mr Draghi’s comments at the press conference implied that the 10bp cut to -0.50% received more support on the Governing Council than the new asset purchases. The updated forward guidance leaves open the possibility of cuts. And the ECB could adjust its new tiered interest rate system to limit the impact of further cuts on banks’ profits.
What’s more, there is still scope for lower policy rates to feed through to lower interest rates faced by the private sector. While average interest rates on bank deposits are negative for non-financial firms in some countries (e.g. Germany and the Netherlands), they are still positive for households. And the interest rates on bank loans could decline further too. We have pencilled in another 10bp deposit rate cut for December this year, but that might now come later.
There is clearly a limit as to how much lower interest rates can go, though. So attention could turn to other tools, like asset purchases. And there is certainly scope for the Bank to do even more QE.
Mr Draghi claimed that the Council did not discuss its issuer limits this week because purchases can go on “for quite a long time” at €20bn per month. Our estimates suggest that the current 33% limit wouldn’t become a big problem until the end of 2021. (See Chart 1.) But the ECB would presumably want to increase its limits well before hitting them in any major economy. And if the economic outlook does not improve in line with the Bank’s expectations, policymakers may want to increase their monthly purchases. They could do that by raising the issuer limits or buying a higher share of corporate bonds.
|
Chart 1: Estimated Share of Eligible Public Sector Bond Market Owned by ECB (%) |
 |
|
Sources: Refinitiv, Capital Economics |
However, while the ECB could expand its asset purchases further, it seems unlikely to do so for some time, not least because there were a number of Council members who opposed yesterday’s QE decision. And the new guidance suggests that if core inflation fails to rise, the Bank will continue buying €20bn per month, rather than increase its purchases.
We were one of the first forecasters to predict that the ECB would re-launch its asset purchases. (See here.) Now that it’s done so, we will review our forecasts in the coming weeks. But the big picture is that whatever the Bank does, it’s likely to be “pushing on a string”.
Ireland’s economy still growing strongly
Ireland’s national accounts data, while difficult to interpret due to statistical distortions, suggest that the economy is growing at a fairly strong pace. That’s consistent with the data on retail sales and VAT revenues. Admittedly, employment growth has slowed and consumer confidence has dropped sharply in recent months as Brexit risks have risen. But provided a no-deal exit is avoided, Ireland should remain a strong performer.
Week ahead
We expect data released next week to show that euro-zone consumer confidence fell in September.
Data Previews
Data Preview – Euro-zone Consumer Confidence (Sep.) Fri. 20th Sep.
|
Forecasts |
Time (BST) |
Previous |
Median |
Capital Economics |
|
Consumer Confidence |
15.00 |
-7.1 |
-7.0 |
-7.5 |
Consumer sentiment probably eased this month
The European Commission’s (EC’s) measure of euro-zone consumer confidence is likely to have fallen again this month, reversing its rise over 2019 so far.
After falling throughout 2018, the consumer confidence index rose somewhat over the first seven months of this year from -7.4 in January to -6.6 in July. But in August it fell back, to -7.1.
Euro-zone equity prices have risen so far this month and in the past this has often been a sign that consumer confidence will rise shortly afterwards. But timelier Ipsos Primary Consumer Sentiment Indices revealed that while sentiment improved in Germany and Spain, it deteriorated in France and Italy. On balance, we suspect that the EC consumer confidence index declined to -7.5 in August.
On past form, this would be consistent with annual household spending growth of about 1.5%. But the indicator has overstated spending growth since the middle of 2017, and we suspect it actually points to spending growth of closer to 1%. (See Chart 2.)
|
Chart 2 : EC Consumer Confidence & Cons. Spending |
 |
|
Sources: Refinitiv, Capital Economics |
Economic Diary & Forecasts
|
Upcoming Events and Data Releases |
||||||||
|
Date |
Country |
Release/Indicator/Event |
Time CEST |
Time (BST) |
Previous* |
Median* |
CE Forecasts* |
|
|
Mon 16th |
 |
Ita |
CPI (Aug, EU Harm., Fin.) |
10.00 |
(09.00) |
(+0.5%)p |
(+0.5%) |
(+0.5%) |
 |
EZ |
ECB’s Philip Lane speaks in London |
14.00 |
(13.00) |
– |
– |
– |
|
|
Tue 17th |
 |
Ger |
ZEW Economic Sentiment (Sep) |
11.00 |
(10.00) |
-44.1 |
-37.8 |
– |
|
Wed 18th |
|
EZ |
Construction Output (Jul) |
11.00 |
(10.00) |
0.0%(+1.0%) |
– |
– |
|
EZ |
CPI (Aug, Fin.) |
11.00 |
(10.00) |
+0.2%(+1.0%)p |
+0.2%(+1.0%) |
+0.2%(+1.0%) |
|
|
EZ |
Core CPI (Aug, Fin.) |
11.00 |
(10.00) |
(+0.9%)p |
(+0.9%) |
(+0.9%) |
|
|
Ita |
Trade Balance (Jul) |
11.00 |
(10.00) |
€5.4bn |
– |
– |
|
|
Thu 19th |
 |
Swi |
SNB Interest Rate Announcement |
09.30 |
(08.30) |
-0.75% |
-0.75% |
-0.75% |
 |
Nor |
Norges Bank Interest Rate Announcement |
10.00 |
(09.00) |
+1.25% |
+1.38% |
+1.25% |
|
|
Fri 20th |
|
Ger |
PPI (Aug) |
08.00 |
(07.00) |
+0.1%(+1.1%) |
0.0%(+0.7%) |
– |
|
EZ |
Consumer Confidence (Sep) |
16.00 |
(15.00) |
-7.1 |
-7.0 |
-7.5 |
|
|
Selected future data releases and events |
||||||||
|
Mon 23rd |
|
EZ |
Markit Composite PMI (Sep, Prov.) |
10.00 |
(09.00) |
47.0 |
– |
– |
|
EZ |
Markit Manufacturing PMI (Sep, Prov.) |
10.00 |
(09.00) |
53.5 |
– |
– |
|
|
EZ |
Markit Services PMI (Sep, Prov.) |
10.00 |
(09.00) |
51.9 |
– |
– |
|
|
Tue 24th |
|
Ger |
Ifo Survey (Sep) |
10.00 |
(09.00) |
94.3 |
– |
– |
|
Thu 26th |
|
EZ |
M3 Money Supply (Aug) |
10.00 |
(09.00) |
(+5.2%) |
– |
– |
|
EZ |
ECB Economic Bulletin |
10.00 |
(09.00) |
– |
– |
– |
|
|
Fri 27th |
 |
Spa |
Retail Sales (Aug) |
09.00 |
(08.00) |
(+3.2%) |
– |
– |
|
EZ |
EC Business & Consumer Survey |
11.00 |
(10.00) |
103.1 |
– |
– |
|
|
*m/m(y/y) unless otherwise stated. p=provisional. Sources: Bloomberg, Capital Economics |
||||||||
|
Main Economic & Market Forecasts |
||||||||
|
%q/q(%y/y) unless stated |
Latest |
Q1 2019 |
Q2 2019 |
Q3 2019 |
2018 |
2019 |
2020 |
2021 |
|
GDP |
+0.2(+1.1) |
+0.4(+1.2) |
+0.2(+1.1) |
+0.2(+1.0) |
+1.9 |
+1.0 |
+0.8 |
+1.0 |
|
Household Spending |
+0.2(+1.2) |
+0.4(+1.1) |
+0.2(+1.2) |
+0.3(+1.3) |
+1.3 |
+1.5 |
+1.3 |
+1.2 |
|
HICP (%y/y) |
+1.0 (Aug) |
+1.4 |
+1.4 |
+1.0 |
+1.8 |
+1.3 |
+1.1 |
+1.2 |
|
Unemployment Rate (%) |
7.5 (Jul) |
7.8 |
7.6 |
7.4 |
8.2 |
7.5 |
7.3 |
7.0 |
|
Depo Rate, end period (%) |
-0.50 |
-0.40 |
-0.40 |
-0.50 |
-0.40 |
-0.60 |
-0.60 |
-0.60 |
|
10 yr. Ger. Bond Yield, end period (%) |
-0.50 |
-0.06 |
-0.32 |
-0.50 |
0.24 |
-0.50 |
-0.25 |
0.00 |
|
$/euro, end period |
1.11 |
1.12 |
1.14 |
1.10 |
1.14 |
1.05 |
1.15 |
1.15 |
|
£/euro, end period |
0.89 |
0.86 |
0.89 |
0.88 |
0.90 |
0.84 |
0.85 |
0.82 |
|
Sources: Bloomberg, Capital Economics |
||||||||
Jack Allen-Reynolds, Senior Europe Economist, +44 20 7808 4995, jack.allen-reynolds@capitaleconomics.com