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Q1 economic growth was hurt by harsh winter weather. A spring rebound will be sustained by improving growth fundamentals. Fiscal and monetary policies will add support to the recovery.
We forecast a small (10bp) cut in the ECB's main refinancing rate next week, but the surprising uptick in Eurozone core inflation in February does increase the risk of a delayed policy response. There remains a tactical case for pre-emptive easing, in our view, as the ECB staff forecasts should reflect downside risks to the medium-term outlook for price stability and March HICP will likely reach new record lows, especially if the EUR remains ‘too strong' for too long.
As the unemployment rate has approached the 7% threshold, the BoE reassessed the state of the economy alongside its February Quarterly Inflation Report. It confirmed expectations for a continued solid growth outlook going forward, underpinned by the reduction of uncertainty, easier credit conditions and the monetary policy stimulative stance.
The general tone of Chair Yellen's semi-annual testimony highlighted the continuity of monetary policy. QE will be phased out in a measured fashion and forward guidance policy remains the focus. Taper on. A high hurdle exists to deviate from continued measured reductions of asset purchases at future meetings. The financial system has been strengthened through regulatory and supervisory actions.
The ECB disappointed those expecting monetary easing today, although by merely arguing that not enough information was available our impression is that Draghi is trying to postpone such a decision. On balance, we believe that a March rate cut remains on the agenda.
The market should remain sluggish, therefore, and concentrated, as in 2013 on "second-time buyers". The rate of fall in prices in the pre-owned sector looks set to accelerate slightly, at -4% yoy, due to higher lending rates, for a cumulative fall of 7% between end-2011 and end-2014.
The ECB's assessment of the medium-term outlook for price stability should remain broadly unchanged despite the lower-than-expected Eurozone HICP print in January. On balance, we expect the ECB to remain on hold on Thursday, but this is a close call. A small (10bp) Refi rate cut now looks more likely than not in March, if not in February, as the result of slightly lower HICP forecasts by the staff.
ECO Focus - Edition February 13, 2014
MPC's CPI inflation projections
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