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The level of mortgage lending rates is likely to be the driver in the housing market. Two scenarios are possible. We prefer a scenario of a very slight increase in OAT and lending rates in late 2016 and in 2017. The windfall effect could subside, therefore. But another scenario is possible, with long-term interest rates held at the same level and very low lending rates, close to those of early 2016.
The ECB press conference has been in line with expectations: Mario Draghi only gave us a rendezvous in September, when the ECB will publish its new macroeconomic projection and when the consequences of Brexit on the Eurozone will be clearer. We agree with the ECB that the Eurozone does not need an acceleration of monetary easing and that the Brexit does not change things dramatically. We maintain our view that the ECB will extend QE by six months and that it will be announced in September. This extension will probably come with an easing of the purchase modalities to face the bonds scarcity.
In the 23 June referendum, a majority of the UK electorate voted in favour of leaving the European Union. Close to 52% of voters opted for a Brexit in a very clear-cut result, especially as the participation rate was a high 72.2%. Apart from the UK, obviously, the economic damage to the rest of the world, at this stage, seems relatively absorbable. Persistent financial uncertainty and volatility are not, however, conducive to investment, which is a source of lasting growth. Conversely, the political fallout is enormous and multifarious. The vote shows us the sad spectacle of where political opportunism and recklessness can lead. It also teaches us that ‘it isn't conceivable because it would be catastrophic' is not a strong political argument.
This publication presents the economists' forecasts for interest rates, exchange rates and commodity prices, along with the Crédit Agricole Group's central economic projection.
In the current conditions, the ECB will face a shortage of bond before the end of this year. We think that Eurozone economic conditions will encourage the ECB to extend QE until at least September 2017, and the basic conclusion to that is that the ECB will have to change its PSPP. Several options are possible – and in reality the PSPP already has enough flexibility to address this shortage: the ‘substitute purchases'. However, while these substitutes appear sufficient to address the shortage of bonds from small countries, things may be more complex where Germany is concerned (and the Netherlands soon after). We do not think that the ECB will let the flexibilities come into force for Germany without making a formal decision about it, and we see the dropping of the capital key as highly complex politically. Scrapping the deposit rate limit appears to be a better option, even if it could push short-term sovereign rates way lower and then pose difficulties for money-market funds – beyond distorting the market further in unchartered waters.
The ECB's QE started in March 2015; 15 months later it was widened (inclusion of corporate bonds and sub-sovereign bonds), increased (to EUR80bn per month) and extended (until March 2017 or beyond if necessary). Other changes are possible, and we think that at the very least QE will be extended until September 2017 – or beyond.
Like the rest of the EU, France will be affected by the United Kingdom's exit from the Union. The impact will, however be modest. In the short term there will be some market turbulence and a deterioration in the business climate. In the medium term, growth will be impacted by a slowdown in exports and foreign investment.
Edition July 22, 2016
France: Existing housing prices
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