Depois da chocante conferência de impressa de Junho, a 3 de Julho o BCE deverá aumentar as suas taxas de juro em 25 bp, e concluir que por agora chega de aumentos
Why this may well be the last ECB rate rise this cycle
After the shocking June press conference, on July 3rd the ECB should hike interest rates by 25 bp, and conclude that for the time being that is enough. Indeed, we are probably approaching the moment when the growth/inflation trade-off hits its worst as the recent PMI and HICP for June confirmed. After Trichet triggered an abrupt market reaction on June 5th, we have listened to all ECB speakers striking a hawkish note, but at the same time trying to calm market fears by saying that the central bank is not embarking on a series of rate hikes. This seems a bit strange given the deteriorated short-term inflation outlook, and implicitly confirms our belief that the June meeting will probably be remembered as a communication accident. Weakening growth figures remain in the background. For the moment…
No tightening cycle
“In our view, given current market conditions, such a tighten-ing, which I would see as significant even if it is only 25 bps, should be enough to bring inflation back down to the target of 2% in the next 18-24 months”. This remark by Lorenzo Bini-Smaghi perfectly synthesizes the inner contradiction of the current ECB’s stance. Hoping that a 25 bp is sufficient to bring inflation back to target is a “wishful thinking”, even because Bini Smaghi knows very well that another small hike can do nothing if oil prices keep accelerating at the steady pace shown so far in 2008. What is important is the fact that he deems a 25 bp move as a significant tightening (and the movement in financial conditions after the June press conference underpins such reading), hence implying no need – at least for the time being – for further hikes. Bini-Smaghi was the latest policymaker in Frankfurt stressing the need of a July move together with the explicit admission that a tight-ening cycle is not on the ECB’s agenda. Belgium’s Quaden and Germany’s Stark made similar remarks.
Especially Stark’s comments (“we are not talking about a series of rate increases”) were particularly telling provided that they come from one of toughest members of the hawkish camp and a long-standing defender of the importance of the monetary analysis. Admittedly, when also Spain’s Ordonez –the representative of a seriously slowing country whose comments this year have always leant on the dovish side – maintains that the ECB is “firmly determined” to prevent risks to price stability, that inflation is not expected to decline before the end of this year, and that even this scenario is subject to up-side risks, then one legitimately wonders whether these days there are any doves left within the Governing Council. Hence, hike in July, enjoy your holidays in August, and see what happens from the autumn onwards.
No near-term relief on inflation…
However, even dismissing the possibility of a series of hikes in the short term and barring any further step-up in the cur-rent (very hawkish) rhetoric at the July meeting, the ECB will remain alert during next months because inflation will likely accelerate further. In June, HICP annual growth climbed to 4.0%, and inflation should then move sideways until September. Clearly, there is no room to relax or to concede that the worst in terms of price increases is over. From October, it will be a matter of how quickly base effects will subtract from headline inflation and the extent to which slowing demand will put a lid on price growth.
A moderate consolation may come from market measures of inflation expectations that, although at their cyclical peak, remain well below any level of warning and from core inflation that is safely below 2% and whose outlook stays benign given the widening output gap. In our view, headline inflation will stay above 3% until end-Q1 2009 and this will keep the ECB on a hawkish posture, to say the least. Thereafter, assuming that euro-denominated Brent prices do not accelerate, HICP dynamics should slow down significantly, and we may get inflation only a tad above 2% in one year from now.
…but GDP outlook is deteriorating
In the intra-meeting period, the growth outlook has turned decisively bleaker. PMIs took a big hit in June, with both ser-vices and manufacturing indices falling into contraction territory. Our Composite PMI is now down to 49.4: this is the lowest reading since mid-2003 and consistent with only 0.2-0.3% GDP growth in Q2 (but monthly momentum was down to only 0.1-0.2% q-o-q at the end of the second quarter).
Incoming evidence confirms Germany’s outperformance, while suggesting that France – the swing state to detect the EMU growth outlook – seems eventually joining Italy and Spain in what looks like a worrying loss of momentum. The services PMI dropped sharply to 49.5 vs. 50.6 in May. The factory PMI fell to 49.1 from 50.6. Worryingly, stocks of finished goods climbed to the highest level since the inception of the survey: this implies that a new orders-to-stock ratio kept declining, hinting at further manufacturing weakness in coming months. All in all, eurozone growth momentum is quickly fading, and sound fundamentals can do little to sup-port the cycle against a backdrop of extremely tight financial conditions, deteriorating global outlook and high inflation. In the past, current PMI levels triggered rate cuts.
Wages are accelerating, but the labor market boom is coming to an end
Under such circumstances, it is crucial to see if any second-round effects materialize. Second-round effects are, in my view, very difficult to 1) define precisely; 2) estimate accurately. Since our view is for tame core inflation throughout the forecast horizon, labor costs dynamics in coming months becomes important for the monetary policy outlook. True, recent wage settlements have been much more generous than in the recent past and the indexation mechanisms still pre-sent (especially in the low-productivity public sector) in some countries are a cause for concern. In the first quarter of this year, both negotiated and hourly wages have in fact accelerated to the fastest pace since 2002, but part of the increase may be attributed to some local outliers – notably Spain – rather than to a widespread spiral. Moreover, the acceleration of unit labor costs to 2.4% in Q1 2008 is in part the natural consequence of a cyclical (even according to the ECB) productivity slowdown. Our take is that these are the kind of solid wage numbers you should see at the end of a strong labor market upswing, and the comparison with the past paints a fairly reassuring picture.
In 2001, the growth rate in negotiated wages was virtually the same as today, while hourly wages were even higher. The ongoing slowdown in employment growth and the stabilization of the unemployment rate suggest that the labor cycle may invert soon – as a matter of fact, this has already happened in Italy and Spain. Hence, the expected weakening in labor demand and easing capacity utilization should offset upside pressures on wages stemming from the ongoing catch-up in some sectors, and demand for pay increases induced by high headline inflation figures.
Therefore, after the July hike, Council members will likely continue talk tough, holding a tightening bias to keep inflation expectations under control. Additional rate hikes are unlikely because disinflationary forces should progressively gather strength as France moves closer to Spain and Italy, while Germany starts giving up (at least in part) its out-standing resilience.
After July, the next move will be a cut
We forecast rates unchanged at 4.25% after July. The forwards are now pricing in three rate hikes by the end of 2009. Contemporarily, the shape of the yield curve is pricing everything but an inflationary risk looming on eurozone prospects. As usual when a turning point is in the neighborhood, things get more complicated. Never in these ten years of ECB we had a similar divergence between growth and inflation trends. However, if we are right that core inflation will stay in check, that the peak in headline inflation is nigh, and that GDP will settle well below potential over the next several quarters, then rate cuts may come back on the ECB agenda next spring when we see inflation decelerating quickly.
Aurelio Maccario, Unicredit
Fonte: EuroIntelligence, em 2 de Julho
