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ECB to start rising rates in 2019 - Wells Fargo

Analysts from Wells Fargo, think that the European Central Bank will begin to slowly raise interest rates in 2019. They see that the probability of “deflationary pressure” in the Eurozone, receding.

Key Quotes: 

“The ECB has not done a very good job of hitting its inflation target of “below, but close to, 2 percent” over the past few years. In an attempt to stoke inflation, the Governing Council slashed its main policy rates to unprecedentedly low levels and it implemented a QE program, which is still in place. The overall inflation rate has moved higher this year, due largely to a rebound in energy prices, although the core rate of inflation, which is a good measure of underlying inflation pressures, remains well short of 2 percent.”

“Assuming that new bond purchases end in late 2018, we also think that the ECB would be in a position to start hiking its policy rates in early 2019. In our view, the Governing Council would aise its deposit rate before changing its other two traditional policy rates (i.e., its two-week refinancing rate and its marginal lending rate). Specifically, we think the Governing Council will make its deposit rate less negative (it could raise it to -0.20 percent), while keeping its other two policy rates unchanged initially. Its next move would be to take the deposit rate to 0.00 percent while also hiking its two-week refinancing rate and its marginal lending rate. However, the ECB likely will not need to hike rates at a fast pace if, as our analysis suggests, inflation trends only slowly higher toward 2 percent. Specifically, our forecast calls for the two-week refinancing rate, which currently stands at 0.00 percent, to rise to only 0.50 percent at the end of 2019.”

“If the overall rate of inflation in the Eurozone trends slowly higher in the months ahead as our analysis suggests, then we think the conditions will be in place for the ECB to eventually dial back policy accommodation. Specifically, we look for the Governing Council to end its bond purchases in late 2018, and we expect it to begin a slow process of rate hikes beginning in early 2019.”

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