Global weekly: Countdown till December

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Expectations continue to build that the US Federal Reserve and the European Central Bank will continue to move their policies in different directions in December. The minutes of their last meetings add to these expectations, and reveal inflation worries within the ECB.

Macro outlook

In Europe, the minutes of the European Central Bank (ECB) provided more evidence of upcoming monetary easing in December. It was very clear from the discussion at the meeting that the ECB is very concerned that inflation will turn out even lower than was projected in September and that the central bank felt compelled to act at the next meeting.

The Governing Council of the ECB discussed the options for further stimulus. It was noted that ‘the present communication already catered for the possibility of extending the programme beyond September 2016’. However, ‘adjusting the overall size and range of eligible assets was seen as requiring further analysis by ECB staff and the relevant committees’. The council also discussed the option of lower rates. The minutes mention that ‘reference was made to the experience in other jurisdictions, where negative rates had not appeared to result in major difficulties or widespread substitution into cash’. This option would also be further examined by committees.

We think the ECB will almost certainly deliver a stimulus package in December. We expect the ECB to step up the pace of its asset purchasing programme by EUR 20 billion per month, to signal that purchases will continue beyond September, and to expand the eligible universe of assets to include regional bonds. On top of that, we expect a 10 basis points (bp) reduction in the ECB’s deposit rate.

In the US, the minutes of the 27-28 October meeting of the Federal Reserve (Fed) were published. The minutes confirmed that 16 December is a “live possibility” for a rate hike. Indeed, the number of participants favouring a rate hike as soon as December, seems to be in a majority. The minutes indicate that
‘most participants anticipated that conditions for normalisation will be met in the next meeting, based on their assessment of the current economic situation and their outlook for economic activity, the labour market and inflation’.

We think that after the liftoff in December the pace of the rate hikes will be slow. We expect the Fed policy rate to reach 0.5% in December 2015. The next hike will be in June, giving the Fed time to assess the impact on the US economy, and thereafter rate hikes every other meeting, resulting in a policy rate of 1.25% at year-end 2016.

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