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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
In its November Inflation Report the BoE revised "materially lower" its projections for CPI inflation, thereby reinforcing the recent shift in market expectations for a later and more gradual path for monetary policy tightening than expected in August. The revisions have been prompted by a much weaker-than-expected actual CPI inflation and greater disinflationary forces coming from abroad.
The ECB has made a number of important dovish changes to its communication, thereby reaffirming its current strategy without any ambiguity. (1) The reference to a roughly EUR1tri balance sheet expansion target has been included in the introductory statement. (2) The ECB remains unanimous in its commitment to ease further if needed and has tasked its staff with “timely preparation” of such unconventional measures. (3) The Governing Council sees indications for downward revisions to staff forecasts in December.
To date, the impact of the CICE (Tax Credit for Competitiveness and Employment) has been patchy. The margin ratio of non-financial companies edged up slightly at the start of the year, but fell back in Q2, and investment continued to adjust. The chosen target range of salaries seems to be having a more pronounced impact on wages and employment than on profitability. The CICE is having a positive short-term effect, but the longer-term impact could be more finely-shaded than expected.
We foresee an annual real GDP growth at 0.5% in 2014. Economic activity is capped by various factors: the business climate; structural issues; and the high unemployment, production facility closures owed to the crisis. These constraints, although still present, should ease in 2015. If the uptick in Eurozone activity is confirmed, volume GDP growth could come in at 1% in France, largely thanks to the positive effects of the structural reforms implemented.
The French government has announced its new public deficit forecasts for 2014 and 2015. These are sharply higher, with a deficit of 4.4% of GDP (compared with the previous estimate of 3.8%) in 2014, and of 4.3% in 2015 (3% previously). The target of a return to a 3% deficit, required by the EU Treaties, has been deferred to 2017. The growth forecasts underpinning the draft Finance Act for 2015 are set at 0.4% in 2014 and 1% in 2015.
The ECB unveiled the details of its ABS and Covered Bonds purchases programmes that will last for at least two years, sticking with 'Plan A' as we expected. The ECB will purchase senior and guaranteed mezzanine ABS tranches in both primary and secondary markets. Retained securities will be included under some conditions, boosting the pool of potential interventions by some margin. All in all, Draghi mentioned a "potential universe of purchases up to EUR1trn" while maintaining a certain degree of constructive ambiguity.
The fed funds target range was maintained at 0%-0.25%. The FOMC announced a $10 billion reduction in the pace of the Fed's asset purchases to $15 billion. Beginning next month, the Fed will buy $10 billion of longer-dated Treasuries and $5 billion of MBS. Asset purchases are expected to end next month. The economic assessment noted economic activity expanding at a moderate pace but significant underutilization of labor resources remains. Inflation expectations are stable but inflation is running below the Fed's longer-run objective.
We look for no change in the fed funds target. Another $10 billion reduction in QE3 asset purchases is expected, split equally between Treasuries and MBS. QE3 purchases are still expected to end in October. The current reinvestment policy is likely to be maintained until after the rate lift-off next year.
The ECB unexpectedly cut all policy rates today, bringing the Refi rate down to 0.05% and the deposit rate to -0.20%. The TLTROs will therefore be conducted at 0.15%. This time the ECB has reached the lower bound as Draghi promised there would be no more rate cuts. The other announcements (an ABS and covered bond purchase programme, with operational details coming in October) and changes to the official statement and staff forecasts were broadly in line with our expectations.
In this Focus, we look at the degree to which prices are overvalued in the UK real estate market in light of standard household solvency indicators. A significant geographical disparity in trends in these indicators suggests that the existence of a housing bubble is limited to London and the south of the country.
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