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INTEREST RATES MONTHLY - DECEMBER 2017 Summary

Core Content Overview

This document provides an analysis of interest rate trends and economic outlook for the Eurozone and the United States in late 2017 and early 2018, focusing on growth, inflation, and central bank policies. It is a report by BNP Paribas Fortis, aimed at professional investors and market participants.

Eurozone: Strong Growth Continues

Main Points:

• The Eurozone is experiencing its strongest growth since the Financial Crisis, with a growth rate of 2.50% (year-on-year).
• Global economic recovery is a key driver, offering European businesses more export opportunities and boosting confidence.
• The labor market is performing well, and the economy benefits from extremely accommodative monetary policy.
• Growth is expected to continue and accelerate to 2.60% by the end of the year.
• In 2018, the Eurozone will still benefit from the global recovery, with growth expected to slow slightly to 2.20% by year-end.
• The export sector and the labor market remain strong growth drivers, positively affecting nominal wages and consumer confidence.

Eurozone: Inflation Lags Behind Growth

Main Points:

• Despite strong economic growth, inflation in the Eurozone remains low at 1.50% in October 2017.
• Core inflation (excluding food and energy prices) is even lower at 0.90%.
• The labor market is not yet showing signs of overheating, and inflation is expected to rise gradually to 1.70% by 2019.

ECB's Gradual Exit from Asset Purchases

Main Points:

• The ECB announced a halving of its asset purchase program from €60 billion to €30 billion in October 2017, effective from January 2018.
• The program is set to be extended until September 2018, with further extension not ruled out.
• The ECB is taking a gradual approach to exiting its stimulus measures, contrasting with the Federal Reserve's earlier tightening.
• The ECB is expected to pause its asset purchases before raising interest rates, with the first rate hike likely in September 2018.

Interest Rates: Gradual Increase Expected

Main Points:

• The ECB's base rate has been at 0.00% since March 2016 and below 0.25% since June 2014.
• A potential pause in 2018 could signal the start of a catch-up with the Fed, which began raising rates in December 2015.
• Long-term European interest rates are expected to rise in 2018 due to strong growth and a slowly increasing inflation.
• The rise in U.S. long-term rates will influence the European trend, with European rates likely to follow if U.S. rates increase rapidly.

United States: Strong Growth Continues

Main Points:

• The U.S. economy grew at 3.30% in Q3 2017, despite the impact of two hurricanes.
• Growth is supported by strong private consumption, positive consumer confidence, and a robust labor market.
• The U.S. is in one of the longest economic expansion periods in its history.
• The Federal Reserve is expected to maintain growth at 3.0% in 2018 and 2.9% in 2019.
• A series of rate hikes could signal the end of the strong growth phase.

United States: Inflation on Track

Main Points:

• Inflation in the U.S. rose to 2.20% in 2017 (year-on-year), driven by higher oil prices after Hurricane Irma.
• Core inflation in September was at 1.70%, still below the target level.
• The tight labor market is expected to eventually lead to wage growth, with a 3% increase anticipated by Q2 2018.
• Inflation is expected to remain stable at 2.00% in 2018 and 2.20% in 2019, with core inflation rising above 2% in 2019.

Federal Reserve at a Crossroads

Main Points:

• The Fed raised its policy rate to 1.25%–1.50% in December 2017, marking the fourth rate hike since December 2015.
• The Fed also announced a monthly reduction of $10 billion from its balance sheet, a symbolic but important shift.
• This marks the first time the Fed has simultaneously raised rates and reduced its balance sheet, signaling a more hawkish stance.
• The impact of this policy shift on financial markets remains to be seen.

Short-Term Interest Rates in the U.S. Rise Gradually

Main Points:

• The U.S. 3-month Libor rate has gradually increased, reaching 1.45%, the highest level since the crisis.
• The yield curve has flattened significantly since 2017, with the spread between short-term and long-term U.S. Treasury rates narrowing.
• The market does not expect a significant increase in long-term rates, with the U.S. 10-year Treasury yield expected to rise only slightly to 3.00% by the end of 2018.

Key Takeaways

• The Eurozone and U.S. economies are both benefitting from global recovery, but the ECB is adopting a more cautious approach to tightening monetary policy.
• Inflation remains below target in the Eurozone, while the U.S. is closer to its target, though core inflation is still subdued.
• The ECB is expected to pause asset purchases before raising rates, with the first hike likely in September 2018.
• The U.S. yield curve flattening suggests market expectations of limited long-term rate increases.
• The Fed's dual move of raising rates and reducing its balance sheet signals a shift in monetary policy direction.

Disclaimer

• This document is not an offer or solicitation for the sale, purchase, or subscription of any financial instrument.
• It is not a prospectus and has not been endorsed or approved by any authority.
• The information is not investment advice and should not be relied upon as such.
• The Bank reserves the right to change the information without prior notice.
• Investors should consult professional advisers before making any investment decisions.