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Franc(ie) goes to Hollywood parity The Swiss franc rose through parity with the euro in the early hours of Monday for the first time on record. However, its foray into uncharted territory was brief, and it has since given up the gains it made in March. It …
11th March 2022
Yesterday’s ECB announcement was more hawkish than expected, but so far the Bank’s Chief Economist Philip Lane hasn’t published a new blog post to correct the message as he has done a number of times in the past. You can read our response to the decision …
In today’s monetary policy statement, the ECB said the Russian invasion of Ukraine was a watershed moment for Europe, but it concluded that it does not require a big change in monetary policy. Indeed, the Bank announced an acceleration in the pace at …
10th March 2022
There has been some discussion of possible FX intervention by the ECB to support the euro, but there is next to no chance of that being announced at today’s press conference, and unless the single currency falls much further we think likely the Bank will …
The EU is considering more joint bond issuance, reportedly of around €200bn or 1.4% of EU GDP. If this is agreed, the devil will be in the detail and the amounts involved may fall short of some expectations. But it could cover much of the additional …
9th March 2022
While the plan to reduce Europe’s reliance on Russian gas this year seems achievable, it will only lock in higher-for-longer gas prices and prolong the squeeze on household incomes. The centrepiece of the European Commission’s “REPowerEU” package, …
The war in Ukraine has prompted us to revise our forecasts for euro-zone GDP, inflation and monetary policy. Russia’s downturn in 2015 had no obvious impact on euro-zone GDP and Russia has become less important as an export market since then. But we …
4th March 2022
Finland most exposed to Russian sanctions We have yet to revise down our GDP growth forecasts for Switzerland and the Nordics in response to the sanctions on Russia, but the negative impact of the conflict will be smaller than for the euro-zone. (Note …
The war in Ukraine has intensified this week, and we have continued to write extensively across all our services about the financial and economic implications, all of which can be found here . In last week’s Weekly , we argued the war in Ukraine would …
Outlook for retail sales darkened by war in Ukraine The small rise in retail sales in January, after a steep fall in December, suggests that Omicron remained a drag on consumption. Although spending will have rebounded in February, higher energy prices …
ECB will stress caution and flexibility in light of Ukraine war. New ECB forecasts will show lower growth, much higher inflation. Policymakers will still plan to resume normalisation when and if the situation is clearer. At next week’s monetary policy …
3rd March 2022
The EU’s decision to suspend its debt reduction rule for another year gives countries the green light to ramp up spending on defence and cushion the blow from higher energy prices. Depending on how long the conflict lasts, and how severe the side effects, …
While supply-chain links between the EU and Russia and Ukraine are small, shortages of seemingly obscure inputs can cause significant disruption, and add to price pressures, if alternatives cannot be sourced quickly. Aside from the most energy-intensive …
Inflation to breach 6% in the coming months After February’s surprisingly strong inflation outturn and with energy prices surging, euro-zone inflation is very likely to rise above 6% in the coming months. It then looks set to remain well above the ECB’s …
2nd March 2022
The EU would have a number of options to help compensate if Russian gas supplies were to be turned off, but in practice we suspect that some degree of power rationing would be needed. Past episodes of energy rationing were not as damaging as one might …
1st March 2022
The impact of the war in Ukraine on energy prices will have a bigger effect on inflation in Italy and Spain this year than in Germany and France. Since the beginning of 2021, energy inflation has surged across the euro-zone, and the latest legs up in oil …
Inflation rising, but ECB will pledge not to tighten prematurely The increase in inflation in Germany and much bigger jumps elsewhere mean that euro-zone inflation for February will come in well above expectations. However, the ECB has bigger concerns at …
In this Update , we answer the key questions about what the exclusion of Russian banks for SWIFT means for Russia and the rest of the world. What is SWIFT? SWIFT (“The Society for Worldwide Interbank Financial Telecommunication”) provides payments …
28th February 2022
The Ukraine crisis will be a drag on the euro-zone economy due to its effect on trade with Russia and the impact of higher energy prices on household consumption. However, this will be cushioned by looser fiscal policy and the region’s high excess …
Back in safe-haven mode Just weeks after hawkish messaging from the ECB helped to weaken the Swiss franc against the euro (see here ), the Russia-Ukraine conflict has put the currency back into full-on safe-haven mode. Perhaps unsurprisingly, the exchange …
25th February 2022
By far the biggest news this week has of course been the Ukraine crisis, and we have written extensively about the implications for the global economy, all of which you can find here . In this Weekly , we will bring out a few key points about what it …
Sentiment high before escalation in Russia-Ukraine conflict February’s increase in the EC Economic Sentiment Indicator showed that confidence was high before the recent news about the conflict in Ukraine. It also showed that supply shortages remained …
The escalation of the Russia-Ukraine conflict has increased uncertainty about the economic outlook for the euro-zone. While things are changing rapidly, at this stage we think the main effects will be to push up inflation but to cause the ECB to tread …
24th February 2022
In an extreme scenario, the impact of the Ukraine crisis on energy prices could add up to two percentage points to the peak in headline euro-zone inflation this year, and one-and-a-half percentage points over the year as a whole. The impact on ECB policy …
23rd February 2022
Upside risks to inflation have risen Core inflation looks set to keep rising as the effects of global demand-supply imbalances persist. And the Ukraine crisis means that the risks to our above-consensus headline inflation forecasts lie to the upside. Data …
Inflation differentials across the euro-zone are unusually wide, in large part due to differences in energy inflation. But we don’t expect this to last. In the coming years, we think that inflation will be higher in the core countries than in the …
22nd February 2022
Economic conditions continue to improve The rise in the Ifo Business Climate Index (BCI) in February strengthens our view that conditions in the German economy continued to improve during Q1. While the latest escalation of Russia-Ukraine tensions will …
Yields on 10-year Swiss government bonds have moved in lockstep with those of Bunds since the start of the pandemic, and thus followed their German counterparts above zero in January. (See Chart 1.) While the Swiss yield has dropped back a bit since …
21st February 2022
Activity rebounding The surge in the euro-zone flash Composite PMI in February suggests that activity is recovering well and supports our view that GDP will rise by around 0.5% q/q in Q1. There are tentative signs that supply chain problems are fading – …
This week saw tensions between Russia and Ukraine get close to boiling point. We have written extensively about the economic implications of a further escalation on both our Emerging Europe and Commodities services and all of our research on the topic can …
18th February 2022
Yet another blow to Riksbank’s dovish stance Statistics Sweden made a bid for the most eyebrow-raising data release of the week with the news this morning that core inflation jumped from 1.7% in December to 2.5% in January. (See here .) We, the consensus …
French President Macron is on course to win re-election in April by a comfortable margin, and is likely to push for a lower tax burden and pension reform in his second term. His main rival Marine Le Pen no longer proposes a “Frexit”, but a victory for her …
Hand of the hawkish triumvirate strengthened The increase in Swedish CPIF excluding energy was significantly higher than expected and pushed the core rate above the Riksbank’s 2.0% target for the first time in nearly three years. While we expect headline …
We think that the gap between the yields of 10-year German and Swiss government bonds will re-emerge over the next couple of years as the ECB tightens policy more quickly than the SNB. Prior to the pandemic, there was a spread between the yield of the …
17th February 2022
While the simmering tensions over Ukraine could keep euro-zone inflation higher for longer than most expect, we think that it is unlikely to put the ECB off plans to start normalising policy this year – provided that there is neither a drastic military …
16th February 2022
Input shortages remain severe The rise in euro-zone industrial production in December took it above its pre-pandemic level and timelier evidence points to a small increase at the start of this year. But input shortages remain severe and the continued …
The tightening of labour market conditions in the euro-zone is likely to help push hourly wage growth up over the next couple of years to more than 3% y/y by 2023. This will serve to strengthen the calls from those pushing for the ECB to begin …
Recovery to resume and labour market to tighten further The small increase in euro-zone GDP in Q4 confirms that the region’s economy was struggling at the end of 2021. But with Omicron under control and restrictions being eased, we expect the recovery to …
15th February 2022
Governor Ingves is not for turning We were surely not the only ones to have thought, “What is the Riksbank playing at?”, following the damp squib of its policy announcement on Thursday morning. Recall that the Bank barely changed its dovish messaging, and …
11th February 2022
Anybody expecting the ECB to completely undo the hawkish policy shift that Christine Lagarde delivered at last week’s meeting will have been disappointed by this week’s numerous policy statements. Admittedly, Ms Lagarde herself adopted a more balanced …
Core inflation to stay well above 2% this year The upside surprise to Germany’s headline inflation rate in January was mostly due to higher energy prices rather than rising underlying inflation. Nonetheless, core inflation of 2.9% is well above the …
Swiss inflation at a 13-year high but will head down from here Inflation was stronger than expected in Switzerland in January, although the upward surprise was not in the same league as that seen in the euro-zone and Swiss inflation is still consistent …
While there are limits to the lessons we can draw from the past, Europe’s experiences since World War Two provide some guidance as to the outlook for wages and inflation. They suggest that the recent surge in inflation will not lead to markedly higher …
10th February 2022
While the Riksbank largely stuck to its dovish stance this morning, the fact that three of the six members of the Executive Board entered reservations and favoured reducing the size of the balance sheet this year leaves the direction of policy on a knife …
Fall in CPI-ATE unlikely to deter the Norges Bank Given the backdrop of a tightening labour market, the fall in CPI-ATE is likely to be a one-off. We think that once the latest wave dissipates, the core inflation rate will pick up again and may rise above …
Any policy tightening by the ECB in 2022-23 will probably be too limited to cause major problems in the bond market. But if interest rates rise much further than we anticipate, that could trigger renewed bond market turmoil – which in turn would …
9th February 2022
Our base case is that monetary tightening by the ECB results in a manageable rise in Italy’s government bond yields. We think it would take 10-year yields rising to 5% or more to bring debt sustainability into question. However, there is no guarantee that …
Both we and the market are now discounting 100bp of ECB rate hikes by the end of 2023. (See Chart 1.) And given the sequencing set out by Christine Lagarde, it seems likely that net asset purchases will end in Q3 this year at the latest. There are a …
8th February 2022
Disappointing end to a terrible year The small decline in production in December was not quite as bad as it looks because it was largely due to a fall in construction activity, but 2021 was still a terrible year for German manufacturers as supply chain …
7th February 2022
“Mr Establishment” gets the job Today’s appointment of Jens Stoltenberg as Governor of the Norges Bank shows that worries of potential political nepotism ultimately fell on deaf ears, and completes the trifecta for top jobs for the ex-PM and Finance …
4th February 2022
