6 Mar 2015
ECB: Rate hikes on the horizon? - RBS
FXStreet (Barcelona) - Richard Barwell, Senior European Economist at RBS, comments that it is essential to consider the possible timing of a rate hike, as the ECB might wish to lift rates before the output gap is in positive territory.
Key Quotes
“We surmise from the latest projections and comments by policymakers that the Council expects underlying inflation to be back at the target by the end of 2017 and the output gap to be closed by 2017.”
“In the good old days when the arguments of the standard reaction function are close to zero then official interest rates would normally be close to neutral. Does that mean that rates should be close to neutral by the end of 2017 rather than at the floor?”
“The first point to note is that the output gap and inflation are only expected to close on the assumption that monetary and financial conditions remain ultra loose for a long period of time.”
“The second point to make here is that if the neutral rate has fallen anywhere then is has likely fallen in the Eurozone, so we are not necessarily talking about several hundred basis points of hikes by 2018.”
“The third point to note is that other central banks have managed to stay at the lower bound until the point of the output gap closing is almost upon them before raising interest rates from the floor, so an output gap closing in 2017 does not immediately compel the ECB to move.”
“However, the Council has made clear that its reaction function has not changed so the strategy pursued by others may not be a good guide to what the ECB will do (The ECB is teaching the market how to think; others hint that they are trying to teach the market a new trick).”
“In short, we do not expect rates to back at neutral in 2018.”
“The reason for asking this question is simply to flag that with the projections that were published we can start to at least thinking about the timing of the first rate hike if the Council wishes to lift rates off the floor before the output gap is in positive territory.”
Key Quotes
“We surmise from the latest projections and comments by policymakers that the Council expects underlying inflation to be back at the target by the end of 2017 and the output gap to be closed by 2017.”
“In the good old days when the arguments of the standard reaction function are close to zero then official interest rates would normally be close to neutral. Does that mean that rates should be close to neutral by the end of 2017 rather than at the floor?”
“The first point to note is that the output gap and inflation are only expected to close on the assumption that monetary and financial conditions remain ultra loose for a long period of time.”
“The second point to make here is that if the neutral rate has fallen anywhere then is has likely fallen in the Eurozone, so we are not necessarily talking about several hundred basis points of hikes by 2018.”
“The third point to note is that other central banks have managed to stay at the lower bound until the point of the output gap closing is almost upon them before raising interest rates from the floor, so an output gap closing in 2017 does not immediately compel the ECB to move.”
“However, the Council has made clear that its reaction function has not changed so the strategy pursued by others may not be a good guide to what the ECB will do (The ECB is teaching the market how to think; others hint that they are trying to teach the market a new trick).”
“In short, we do not expect rates to back at neutral in 2018.”
“The reason for asking this question is simply to flag that with the projections that were published we can start to at least thinking about the timing of the first rate hike if the Council wishes to lift rates off the floor before the output gap is in positive territory.”