22 June 2018
Smooth end to Greek debt programme

The deal reached overnight confirms a piecemeal approach to Greek debt relief. While concerns about the long-term sustainability of the country's debt look set to eventually resurface, the additional relief measures put in place and post-programme governance should be enough to keep Greek risk under control for some time

Green light to late-August end of third Greek programme

By confirming that Greece has implemented all of the 88 prior actions under the fourth and final review, eurogroup chief Mario Centeno announced that Greece has successfully completed its ESM (Emergency Stability Mechanism) programme and that there will be no follow-up programme.

Yesterday’s meeting was widely expected to disclose a new batch of medium-term debt relief measures to make Greek debt sustainable. These were indeed announced overnight, with a different mix from what the debate had suggested. The growth-related French mechanism was not part of the deal, nor was an explicit liability management exercise. Approved measures involve extensions of interest rates and maturities, medium-term measures, and the creation of a cash buffer. Amid the current, unstable political backdrop, the chances of building the necessary consensus on politically-binding and more ambitious debt relief measures were indeed slim.

Eurozone: Setting and showing limits to the French-German axis

Eurozone finance ministers tried to put up a brave front at last night's meeting in Luxembourg. But there was more disagreement than agreement on how to further integrate the monetary union

It's been another typical European negotiation process. Months ago, with plenty of time to prepare for the June EU summit, there were still many diverging views, ranging from European dreams to simply saying “nein” to everything. At the start of this week, a compromise on further Eurozone reforms seemed to be in the making, with an agreement between France and Germany on credible proposals for the future of the eurozone. Last night’s eurogroup meeting, however, shows that next week’s European Summit of government leaders still has lots of unfinished work to do.

Bank of England keeps the door to an August hike firmly open

Despite a fairly mixed run of data, the Bank remains relaxed about the first quarter slowdown and is confident about wage growth. An August rate rise still looks more likely than not

The run of economic data since the May meeting has been pretty mixed, but the key message from the Bank of England (BoE) today is that they're comfortable things remain on track.

Importantly, the Bank remains just as confident that the economy is rebounding after the weak first quarter as it did back in May, pointing to the rebounding household activity as a key example.

An August rate hike is still more likely than not

Policymakers also remain upbeat about wage growth – a central part of the Bank’s thinking on rate hikes – suggesting that the recent moderation we’ve seen in average earnings hasn’t fazed the committee. The 3M/3M annualised rate of change in wage growth has slipped from around 3% at the turn of the year, to just under 2.5% now. But with Bank agents still pointing to faster pay hikes in response to skill shortages within the jobs market, the BoE noted “domestic costs pressures will continue to firm gradually”.

To us, this all suggests that an August rate hike is still more likely than not. While the Bank hasn’t offered any firm signals or commitments this time, the overall outlook and tone suggest they’d still like to raise rates if the data allows. It’s also worth noting that one extra member – Chief Economist Andy Haldane – has joined two others in voting for an immediate rate hike.

But nothing is guaranteed - there's still plenty of data to come between now and August. Our main concern remains the retail sector, where ongoing consumer caution, higher wage costs and rising business rates still appear to be causing real difficulties. If further cracks begin to appear, then the Bank may be forced to puts its tightening plans on ice for a little while longer.

More of the same from the Swiss central bank

As expected, the central bank left rates unchanged today and still believes the franc is “highly valued”. Given that a strong appreciation of the franc is its worst nightmare, we believe it will wait for the ECB and won't hike before December 2019

Nothing new for monetary policy

The target range for the three-month Libor was maintained between -1.25% and -0.25% and the interest rate on sight deposits with the Swiss National bank remains at -0.75%. Moreover, the central bank reiterated its willingness to intervene as required in foreign exchange markets to prevent an appreciation of the Swiss franc. 

The Bank still believes the franc is “highly valued,” noting its volatility over the past three months and saying it is still considered a safe-haven asset. Indeed, according to the SNB, political factors in the euro area are the main culprits for the recent appreciation of the franc.

Norges Bank confirms September rate hike

As expected, the Norwegian central bank reiterated its intention to raise interest rates in September. This shows the NB is on a more hawkish path than most other European central banks

Norges Bank’s policy statement today confirmed that “the key policy rate will most likely be raised in September 2018”, a more explicit line than the previous intention to raise interest rates “after the summer”.

The interest rate path now shows an average of 0.53% in 3Q, consistent with a September rate hike, and 0.76% in 4Q, indicating some chance of another hike already in December. Further out, the rate path shows an average of two hikes per year in 2019-21.

The NB’s GDP and output gap forecasts are largely unchanged from March, while the headline inflation forecast has been revised up for 2018 but down in 2019, while the core inflation forecast is revised down throughout the forecast period. This is largely due to higher energy prices and some downside surprises in core inflation this spring.

The key factors driving the upward revision of the interest rate path are the higher oil price since March and the weaker-than-forecast krone exchange rate.

Today’s announcement reinforces our view that the Norwegian central bank is in a more hawkish mode than its fellow central banks in western Europe. Importantly, today’s announcement demonstrates clearly that the NB is not tied to the ECB’s policy path in the way that the Riksbank and Swiss National Bank are: the ECB’s dovish surprise last week has not led the NB to revise its stance.

It is also notable that weaker core inflation has not prompted the NB to revise its interest rate path lower (though it does push down on the NB’s rate path calculation). This is in clear contrast to the Riksbank, which revised its rate path down in April after several months of negative surprises in core inflation.

So long as the recovery in the domestic economy stays on track and oil prices hold up, the NB is likely to remain in tightening mode. We fully expect the NB to deliver a hike in September and see the next hike after that most likely coming in March 2019.

This suggests further upside in NOK. The krone has strengthened materially on the back of the NB’s announcement and EUR/NOK is currently testing the 9.40 level. While the krone is held back by the overall risk negative environment in the near term, the NB’s stance is likely to provide a substantial tailwind.

China policies to cushion potential trade war impact

China has started pre-emptive measures to buffer the negative impacts of rising trade and investment tensions between China and the US

China adopts measures to soften the impact of a potential trade war

China will not passively sit back if a trade war is unleashed. Indeed, it is already implementing policies to temper any effect  We look at some of the more important ones below.

Germany: Merkel sunset postponed

The growing government crisis in Germany has been defused, temporarily. However, the fact that the interior minister has given the chancellor a kind of ultimatum shows once again that the situation remains strained

It is a normal political phenomenon that the longer a politician is in office, the higher the number of swan songs they will get. German Chancellor Angela Merkel has survived and managed several difficult situations during nearly 13 years in office. However, most of these crises were on the European stage. The current one is playing out on the domestic stage. And even worse, it is within her own coalition. The chancellor's political survival has never been more at risk than it is right now.

Reading time around 8 minutes

In case you missed it: Divergence and divisions

The split among Europe's central banks was brought into sharper focus this week, as the Bank of England and Norges Bank kept the door open to rate hikes while the Swiss National Bank stuck to its dovish stance, in line with the ECB. In the eurozone itself, finance ministers at least attempted a show of unity, though cracks appeared here, too

In this bundle