As expected, the ECB kept rates unchanged and did not provide new guidance. At the press conference, President Lagarde said that she stands by her earlier comments that rate cuts could come in the summer. We continue to expect the first cut in June, followed by two more 25bp cuts later this year, but acknowledge that risks are tilted towards earlier cuts, see ECB Review – Didn’t rock the boat, but sailing towards a rate cut, 25 January. The ECB Bank Lending Survey published on Tuesday confirmed further tightening of credit standards and a decline in loan demand, while EA January flash PMIs were mixed with manufacturing activity topping expectations and momentum in services disappointing.
Earlier this week, Bank of Japan (BOJ) kept its quantitative and qualitative easing with yield curve control policy unchanged as expected. We expect the BOJ to start normalising policies at the April meeting when they are more certain that wage growth will pick up. Also, Norges Bank (NB) unanimously decided to leave policy rates unchanged, fully in line with consensus expectations and market pricing. We expect NB to keep policy rates unchanged in March and deliver five rate cuts this year starting in June, see RtM Norway: Norges Bank Review – Unchanged – we still expect the first cut in June, 25 January.
In China, the PBOC pre-announced a cut in the reserve requirement ratio (RRR) for banks of 0.5 percentage points effective from 5 February. The PBoC also signalled more easing was on the way by stating that the RRR rate is still relatively high and that the policy pivot by the Fed would expand their policy space. The rising US-China policy rate spread has been a concern for PBOC as it could destabilise the CNY.
Turkey’s CBRT finalised its hiking cycle by raising its policy rate to 45% as expected. We do not expect further hikes, but rates will most likely remain high for some time, as the monthly momentum for inflation has declined but headline inflation remains above 60%.
In geopolitics, Sweden took an important step towards becoming a NATO member country after the Turkish parliament finally approved Sweden’s accession bid. Hungary’s Prime Minister Viktor Orbán was quick to announce that his government would also support the ratification of Sweden’s accession. However, Hungary’s parliament is on a winter break until 26 February. Read more about the latest developments in our monthly Geopolitical Radar – Political status quo in Taiwan, truce hopes rise in Gaza, 25 January.
Next week, all eyes will be on the FOMC meeting on Wednesday. We think the Fed is in a comfortable position with regards to both sides of its dual mandate, read more in Research US: Fed preview – Patience and Gradualism, 26 January. The US economy remains on a strong footing as confirmed by Q4 GDP data as the US economy grew by 3.3% AR. This week, the Fed decided to raise the lending rate on new loans in its emergency lending program and announced that the program would end in March.
The key data release next week will be EA inflation on Thursday. We will also pay attention to country-specific releases starting on Tuesday. In China, official PMIs are due on Wednesday, and the Caixin manufacturing survey on Thursday. In the US, the Michigan survey on Friday will shed light on consumer sentiment and inflation expectations.
Full report in PDF.
