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HSBC Report Points to ECB Inflation Hope

By:
Peter Taberner

In a report on the European Central Bank (ECB), the HSBC bank has dissected the bank’s agenda, with an inflation rise one of the biggest priorities. HSBC

HSBC Report Points to ECB Inflation Hope

In a report on the European Central Bank (ECB), the HSBC bank has dissected the bank’s agenda, with an inflation rise one of the biggest priorities.

HSBC believe that the markets doubt the willingness of the ECB to tackle the inflation problem, of reaching the desired 2% threshold.

Also, the euro area is unresponsive to economic slack, and therefore recovery.

As inflation falls, it becomes embroiled in various formal and informal rules in pricing contracts, that are linked to future prices for inflation today, HSBC said.

Even if economic recovery begins to accelerate at pace, inflation could still remain lower than 1%, if inflation expectations are dislodged.

The best means to hike inflation HSBC believe, is to push the exchange rate down, resulting in import prices being increased.

Growth Forecasts May Be Revised Upwards

The ECB will have enough ammunition to act on inflation, as the September growth projections are down for 2017 at 1.7%, below target.

Economic growth for this year may be revised upwards, since the last projections were made, as there has been a rise in expectations. For the first two quarters growth figures were raised from the original forecasts.

Recent figures from the Markit Purchasing Manager’s Index revealed that activity in euro area business activity rose by 0.5% from October to November. The highest monthly gain in five years.

The growth figure for the next two years HSBC expect to remain largely unchanged.  Even if the composition of growth alters, with exports and investments falling, which are then compensated by higher public spending.

The influx of asylum seekers may also result in higher public spending, as demonstrated by Germany in the third quarter of this year.

Inflation outlooks may be changed by the anticipation of lower oil prices, for 2016 the inflation forecast is 1.1% from the ECB, 0.1% higher than put forward by HSBC.

Expectation of Deposit rate Cut

In their report, HSBC opined that the cutting of the bank deposit rate would be an effective tool, in pushing the euro down.

Additionally, a negative deposit rate could have the effect of funnelling excess reserves, from the balance sheets of core euro area countries to more peripheral ones.

Although HSBC warned that negative interest rates can be counter productive, as you would not want to cause a run on the euro.

Despite that view, HSBC are expecting a reduction in the deposit rate of about 10 basis points at this stage, with a further ten point cut next year.

QE likely to be Extended

Quantitative Easing (QE) is expected to be expanded to act as a counter force to the downward pressures on the euro.

The size of the asset programme may face constraints, due to the comparably small size of the German bond market, and that there is a collective action clause over new euro zone issuance.

Due to this stipulation, the ECB must remain a minority shareholder to avoid being in discussions on debt restructuring.

Increasing the asset purchase rate is now difficult HSBC believe, and that the ECB  could alter the QE timeframes.

Even facilitating an open ended QE market, and tying asset purchases to their inflation mandate of around the 2% benchmark.

HSBC Report Points to ECB Inflation Hope
HSBC Report Points to ECB Inflation Hope

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