March 2016 Fed dents the dollar |
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Overview The ECB announced a comprehensive package of policy measures following its March meeting in response to increased downside risks to the inflation outlook. It cut the main interest rate by 5bps to 0%, lowered the deposit rate by 10bps to -0.4%, expanded the size and scope of QE – it will now buy assets at a pace of €80bn per month including the purchase of non-bank corporate bonds - and will conduct a series of targeted longer-term refinancing operations (TLTROs) starting in June. The measures announced have contributed to a decline in government and corporate bond yields, but the euro has strengthened against the dollar despite the significant easing of policy. The dollar has been on the back foot generally in recent weeks, losing ground against a broad range of currencies, as the Fed has adopted a more cautious approach to future interest rate increases. It is concerned about the potential impact of weaker global growth on the US economy and so now sees ‘a somewhat lower path for the federal funds rate than was anticipated in December’ (when it hiked by 25bps). Despite the caution, the Fed is still likely to raise rates further over the remainder of this year, which ultimately should support the dollar. Meanwhile, sterling is amongst the currencies that have strengthened against the dollar recently, rebounding by around 4% from its late February lows, though it has weakened a little further against the euro to c.79p. It may come under pressure given uncertainty in the run up to the UK's June EU referendum. |
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Euro area GDP increased by 0.3% q-o-q in Q4 2015, the same as in Q3. Investment rose strongly and consumer spending increased further, but net exports made another negative contribution to growth. Turning to 2016, the composite PMI fell in January-February before rebounding in March, leaving the average reading in Q1 slightly below Q4 though still consistent with GDP growth of around 0.3%. The labour market recovery is continuing, but inflation has fallen back into negative territory reflecting the impact of declining energy costs. In light of increased downside risks to the inflation outlook, the ECB eased policy substantially at its March meeting, including cutting interest rates and expanding QE, which has contributed to a fall in government and corporate bond yields. However, the euro has strengthened against the dollar, notwithstanding the ECB’s actions, as the Fed’s cautious approach to raising interest rates has weighed on the US currency. |
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Solid consumer spending in UK |
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The UK economy expanded by 0.6% q-o-q in Q4 2015, driven mainly by consumer spending (the Q4 number was revised up from 0.5%). Retail sales in January-February increased by 1.6% from Q4, pointing to another solid rise in spending in the opening quarter of 2016. More broadly, the Purchasing Managers composite index of economic activity fell in February albeit at almost 53 it remained well above the 50 expansion-contraction threshold. Employment rose further in the 3 months to January and annual earnings growth picked up. Headline inflation remains subdued at 0.3% but the core rate is running above 1%. The Bank of England's MPC kept interest rates at 0.5% at its March meeting and said its 'best collective judgement' is that rates 'will need to increase' over the coming years. It also noted that uncertainty surrounding the forthcoming EU referendum may 'delay some spending decisions…in the near term'. |
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Fed cautious on rate hikes |
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The US economy grew by 0.3% q-o-q in Q4 2015 (revised from 0.2%) after expanding by 0.5% in Q3. Indicator data for the opening months of 2016 paint a somewhat mixed picture. Surveys of activity have generally been on the soft side, but the hard data have been more encouraging with consumer spending continuing to rise and manufacturing output increasing in January and February. Employment growth remains solid, averaging 207,000 a month in January-February. Headline inflation has risen by almost one percentage point to 1% since October and the core rate is up almost 0.5% points to 1.7%. While acknowledging the on-going improvement in the labour market and the pick-up in inflation, the Fed kept interest rates on hold in March. It cited the potential impact on the economy of weaker global growth, which it said warranted a cautious approach to raising rates. |
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This document has been prepared by the Economic Research Unit at The Governor and Company of the Bank of Ireland (“BOI”) for information purposes only and BOI is not soliciting any action based upon it. BOI believes the information contained herein to be accurate but does not warrant its accuracy nor accepts or assumes any responsibility or liability for such information other than any responsibility it may owe to any party under the European Communities (Markets in Financial Instruments) Regulations 2007 as may be amended from time to time, and under the Financial Conduct Authority rules (where the client is resident in the UK), for any loss or damage caused by any act or omission taken as a result of the information contained in this document. Any decision made by a party after reading this document shall be on the basis of its own research and not be influenced or based on any view or opinion expressed by BOI either in this document or otherwise. This document does not address all risks and cannot be relied on for any investment contract or decision. A party should obtain independent professional advice before making any investment decision. Expressions of opinion contained in this document reflect current opinion as at 31st March 2016 and is based on information available to BOI before that date. This document is the property of BOI and its contents may not be reproduced, either in whole or in part, without the express written consent of a suitably authorised member of BOI. |
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