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We think that the gap between the yields of 10-year German and Swiss government bonds will re-emerge over the next couple of years as the ECB tightens policy more quickly than the SNB. Prior to the pandemic, there was a spread between the yield of the …
17th February 2022
The further rise in inflation to close to 50% y/y in January was clearly not enough to sway Turkey’s central bank (and crucially, President Erdogan) to shift back to orthodoxy as the one-week repo rate was left at 14.00% at today’s MPC meeting. We expect …
Euro-zone commercial property markets ended 2021 on a stronger note. Prime rental growth picked up in the office and industrial sectors, while retail rents held steady for the third consecutive quarter. Combined with further declines in property yields, …
While the simmering tensions over Ukraine could keep euro-zone inflation higher for longer than most expect, we think that it is unlikely to put the ECB off plans to start normalising policy this year – provided that there is neither a drastic military …
16th February 2022
The rest of Emerging Europe is particularly exposed if a further escalation of Russia-Ukraine tensions lead to higher global energy prices and disruptions to commodity exports, with Bulgaria and the Baltic States most at risk from possible interruptions …
Ukraine’s economy as a whole is in a better position to weather significant capital flight and sharp falls in the hryvnia than at any point in the past decade. But even so, there are key pockets of vulnerability that could be exposed if there is a major …
Rapid acceleration bolsters case for interest rate hike Israel’s economic recovery unexpectedly accelerated at the end of last year, with the 16.6% annualised rise in GDP in Q4 pushing it far above its pre-pandemic trend. Alongside the rise in inflation …
Input shortages remain severe The rise in euro-zone industrial production in December took it above its pre-pandemic level and timelier evidence points to a small increase at the start of this year. But input shortages remain severe and the continued …
The tightening of labour market conditions in the euro-zone is likely to help push hourly wage growth up over the next couple of years to more than 3% y/y by 2023. This will serve to strengthen the calls from those pushing for the ECB to begin …
CPI inflation may rise to a peak of nearly 8.0% in April The rise in CPI inflation in January from 5.4% to a new 30-year high of 5.5%, the latest rise in oil prices and the new item weights mean that we now think CPI inflation will rise to a peak of 7.9% …
A Russian invasion of Ukraine would not make a Chinese attack on Taiwan more likely and would not undermine the willingness or ability of Taiwan’s allies to come to its defence. The argument that hostilities between Russia and Ukraine would heighten the …
15th February 2022
Net capital outflows from emerging markets have intensified over the past month as growing tensions between Ukraine and Russia and the prospect of tighter global monetary policy have caused risk appetite to sour. The external environment will remain …
Tensions between Russia and the West have intensified and rattled global financial markets. Amidst the uncertain situation, this Update brings together some of the key implications of the crisis for Russia, Ukraine and the rest of Emerging Europe . (See …
Our new, higher interest rate forecast suggests that mortgage rates will climb to an eight-year high in 2023, making house prices look expensive by historical standards. But the overvaluation won’t be as extreme as it was on the eve of the financial …
Recovery to resume and labour market to tighten further The small increase in euro-zone GDP in Q4 confirms that the region’s economy was struggling at the end of 2021. But with Omicron under control and restrictions being eased, we expect the recovery to …
Strong end to Q4 but headwinds will put the brakes on recoveries Q4 GDP data for Central and Eastern Europe (CEE) were generally stronger-than-expected as policymakers responded to virus outbreaks with only light-touch restrictions and easing supply …
A recipe for further interest rate hikes Employment has recouped the falls after the furlough scheme, the unemployment rate has fallen to pre-COVID levels, job vacancies are at a record high and wage growth is rising. That’s a recipe for more interest …
Our forecasts suggest that prime all-property rental growth across the main euro-zone markets is likely to keep pace with inflation in the coming years. However, this is more of a reflection of expected demand and supply conditions, than an indication …
14th February 2022
Although last week’s hawkish surprises from the ECB and the Bank of England weaken the case for further US dollar appreciation against the euro, sterling, and other European currencies, we are sticking to our view that the greenback will strengthen a bit …
11th February 2022
After a record-breaking 2021, survey evidence points to a strong start to the year for pan-European (excluding UK) investment volumes. With pent-up demand mostly exhausted, we expect transactions to slow in the second half of the year. Nonetheless that …
Rising inflation has put major DM central banks under pressure and interest rate expectations have risen. But most emerging markets look relatively well placed to weather a period of DM policy tightening. Current account deficits are generally small or in …
The further surge in US CPI inflation from 7.0% in December to a 40-year high of 7.5% in January and some hawkish comments by US Fed officials have rattled global financial markets this week, with UK markets being caught in the crossfire. And recent …
Russia’s central bank (CBR) maintained the pace of its tightening cycle today with another 100bp interest rate hike, to 9.50%, and the hawkish communications suggest that the cycle will not stop until the CBR has confidence that inflation has peaked. This …
Governor Ingves is not for turning We were surely not the only ones to have thought, “What is the Riksbank playing at?”, following the damp squib of its policy announcement on Thursday morning. Recall that the Bank barely changed its dovish messaging, and …
Anybody expecting the ECB to completely undo the hawkish policy shift that Christine Lagarde delivered at last week’s meeting will have been disappointed by this week’s numerous policy statements. Admittedly, Ms Lagarde herself adopted a more balanced …
The exceptionally strong rebound in commercial property returns has been clear from the middle of last year. While this came earlier than most expected, we think it reflected special conditions and won’t last. Despite increased uncertainty from the …
Core inflation to stay well above 2% this year The upside surprise to Germany’s headline inflation rate in January was mostly due to higher energy prices rather than rising underlying inflation. Nonetheless, core inflation of 2.9% is well above the …
Swiss inflation at a 13-year high but will head down from here Inflation was stronger than expected in Switzerland in January, although the upward surprise was not in the same league as that seen in the euro-zone and Swiss inflation is still consistent …
We already expected that rental growth would surge to a decade-high this year. But the strength of leading indicators and the low level of rents relative to income by historical standards suggest rental growth will exceed even that forecast and remain …
Shrugging off Omicron, but big squeeze in real incomes lies ahead When combined with the CPI inflation rate of 5.4%, the 0.2% m/m fall in GDP in December meant that the economy experienced a taste of stagflation at the end of last year. As it was driven …
While there are limits to the lessons we can draw from the past, Europe’s experiences since World War Two provide some guidance as to the outlook for wages and inflation. They suggest that the recent surge in inflation will not lead to markedly higher …
10th February 2022
We estimate that the leap in utility prices and hike in taxes on 1 st April will reduce real household disposable incomes over the next two years by a cumulative £80bn. The resulting 2.0% decline in real incomes in 2022 will be the largest on record. (See …
While the Riksbank largely stuck to its dovish stance this morning, the fact that three of the six members of the Executive Board entered reservations and favoured reducing the size of the balance sheet this year leaves the direction of policy on a knife …
Fall in CPI-ATE unlikely to deter the Norges Bank Given the backdrop of a tightening labour market, the fall in CPI-ATE is likely to be a one-off. We think that once the latest wave dissipates, the core inflation rate will pick up again and may rise above …
Inflation continues to rise, another large rate hike incoming The latest data show that Russia’s economy grew strongly in December and that consumer price inflation rose to 8.7% y/y in January. The inflation reading was weaker than expected, but inflation …
9th February 2022
We now think that Bank Rate will rise from 0.50% currently to 1.25% sooner than we previously thought. What’s more, we now expect three more 25 basis point (bps) rate rises in 2023, resulting in rates ending next year at 2.00%. That compares to the …
Any policy tightening by the ECB in 2022-23 will probably be too limited to cause major problems in the bond market. But if interest rates rise much further than we anticipate, that could trigger renewed bond market turmoil – which in turn would …
Property valuations, compared to bonds and equities, deteriorated for a fourth consecutive quarter in Q4. The spread between the asset classes narrowed as the magnitude of the fall in all-property yields outweighed marginal downward moves in gilt and …
Our base case is that monetary tightening by the ECB results in a manageable rise in Italy’s government bond yields. We think it would take 10-year yields rising to 5% or more to bring debt sustainability into question. However, there is no guarantee that …
The National Bank of Romania (NBR) accelerated its tightening cycle today with a 50bp hike to its key policy rate (to 2.50%) and, with inflation firmly above the central bank’s target, we think this cycle has plenty more room to run. We now expect the …
The National Bank of Poland (NBP) raised its policy rate by another 50bp, to 2.75%, at today’s meeting and, while there was little change in language in the statement, we think a backdrop of strong wage and price pressures will prompt further hikes to …
8th February 2022
Both we and the market are now discounting 100bp of ECB rate hikes by the end of 2023. (See Chart 1.) And given the sequencing set out by Christine Lagarde, it seems likely that net asset purchases will end in Q3 this year at the latest. There are a …
If oil prices were to remain at their elevated levels, they could push current account and budget balances into surplus in many of the EM producers. It would also ease any concerns about dollar pegs in the Gulf, although we think the currencies of Angola …
Slowdown unlikely to signal cooling market yet The smaller gain in house prices in January reported by Halifax is unlikely to mark the start of a sharp deceleration in house price growth. With the supply of homes for sale still very limited and mortgage …
7th February 2022
Disappointing end to a terrible year The small decline in production in December was not quite as bad as it looks because it was largely due to a fall in construction activity, but 2021 was still a terrible year for German manufacturers as supply chain …
Overview – It is likely to take longer than most expect for rising interest rates to cool the housing market. Mortgage rates have only just begun to rise from the record low reached in November, and limited supply, high household savings, and the boost to …
4th February 2022
What came through most clearly in yesterday’s Monetary Policy Committee (MPC) statement was the signal that the MPC will act to quash rising cost, price and wage expectations. We unpacked the Bank of England’s February meeting, at which it raised interest …
A Russian invasion of Ukraine or severe ratcheting up of sanctions would add as much as 2%-pts to inflation in DMs, particularly in Europe. Given the inflationary backdrop and hawkish signals from central banks, monetary policy could be tightened more …
Financial conditions have continued to tighten in Latin America and Emerging Europe and will likely remain restrictive throughout the year, weighing on activity in both regions. Meanwhile, although they have tightened too, conditions in Asia generally …
Weak lira not having the desired trade effect? The latest indicators raise concerns that the boost to Turkey’s competitiveness from a weak lira that the government has been banking on as part of its new growth model may not be having the desired effect. …
