UK

BoE to adopt a “wait‐and‐see” attitude

As expected the Bank of England (BoE) voted unanimously to leave the policy rate unchanged at 0.75% following its previous rate hike decision in August. Since the committee's previous meeting, there had been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.

For now, we expect BoE to adopt the 'wait‐and‐see' mode after having raised rates in August until they have a clear idea of what Brexit will look like. Assuming a Brexit deal is struck and the economy performed well, we can expect one ‐ two rate hike in 2019 and another two in 2020 to bring the policy rate to 1.50% ‐ 1.75%.

• In line with ours and market expectation, the Bank of England (BoE) voted unanimously to leave the policy rate unchanged at 0.75% following its previous rate hike decision in August. Since the committee's previous meeting, there had been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.

• Meanwhile, the central bank expressed concerns over the further announcements on protectionist measures by China and US which if implemented, “could have a somewhat more negative impact on global growth than had been anticipated at the time of the August Report”. Besides, the recent rise in economic and wages growth had not affected the MPC's commitment to "gradual" and "limited" rate rises in the coming years.

• For now, we expect BoE to adopt the 'wait‐and‐see' mode after having raised rates in August until they have a clear idea of what Brexit will look like. Assuming a Brexit deal is struck and the economy performed well, we can expect one ‐ two rate hike in 2019 and another two in 2020 to bring the policy rate to 1.50% ‐ 1.75%.

Euro

ECB’s decision fell in line with our expectation

As expected, the ECB left the interest rate unchanged and announced its decision to reduce the monthly pace of the net asset purchases to €15bil from the current €30bil after September and expect the QE to end in December 2018 pending on the upcoming macro data, which falls in line with our view. Meanwhile, the ECB did however warn that global risks such as financial market volatility and protectionism had gained "prominence."

We found the ECB reaffirmed policy rates will remain unchanged through summer 2019 and this implies a rate hike in late 2019, rather than no rate move until early 2020 as priced by the market. Firmer wage growth data — particularly if sustained — will support the case for unwinding some monetary accommodation. Meanwhile, we remain cautious on our medium‐ to long‐term outlook with regards to the ECB policy, due to subdued underlying inflation dynamics.

• As expected, the ECB left the interest rate at 0% and the rate is expected to remain at their present levels at least through the summer of 2019 in order to keep the inflation lower but close to the target 2%. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain at 0.00%, 0.25% and minus 0.40%, respectively.

• Besides, the central bank announced its decision to reduce the monthly pace of the net asset purchases to €15bil from the current €30bil after September and expect the QE to end in December 2018 pending on the upcoming macro data, which falls in line with our view.

• Meanwhile, the ECB did however warn that global risks such as financial market volatility and protectionism had gained "prominence."

• We found the ECB reaffirmed policy rates will remain unchanged through summer 2019 and this implies a rate hike in late 2019, rather than no rate move until early 2020 as priced by the market. Firmer wage growth data — particularly if sustained — will support the case for unwinding some monetary accommodation. Meanwhile, we remain cautious on our medium‐ to long‐term outlook with regards to the ECB policy, due to subdued underlying inflation dynamics.

Turkey

Another rate hike is high on the table

Turkey central bank raised its benchmark policy rates aggressively by 625bps to 24%, higher than market and our expectations of 21%. Besides, the central bank ended the meeting on a hawkish tilt tone, pledging to remain pre‐emptive on its monetary policy.

Though, the tightening stance will provide some breathing space, we are of the view that the underlying risk still lingers surrounding Turkey due to the strength of US dollar and its high exposure to dollar denominated debt. Thus, with the ongoing tightening global liquidity, fight with Washington, the recent ratings downgrades and risk of political meddling, Turkey remains vulnerable. Possibilities for another rate hike during the October meeting remains high on the table.

• The Central Bank of Turkey (TCMB) raised its benchmark policy rates aggressively by 625bps to 24%, higher than market and our expectations of 21%. At the same time, TCMB ended the meeting on a hawkish tone, pledging to remain pre‐emptive on its monetary policy. TCMB also stated to provide funding through one‐week repo auctions instead of overnight lending rate starting 14th September.

• Following the recent inaction on the overheating economy due to political meddling amid the President Erdogan called for a rate cut ahead of the MPC meeting, the central bank’s move today was welcomed positively among investors and led to a strong appreciation in lira, up 2.9% to 6.16. The move also suggest the likelihood of capital control remains low.

• Meanwhile, TCMB acknowledged the growing inflationary risk following the sharp depreciation in Lira despite slowing domestic demand. But TCMB cited to continue monitoring (1) inflation expectations; (2) pricing behavior; (3) lagged impact of recent monetary policy decisions; (3) contribution of fiscal policy to rebalancing process; and (4) other factors affecting inflation suggesting the further rate hikes still remains in cards in the coming month. Besides, with, we believe it will provide some breathing space in the EM space.

• Though, the tightening stance will provide some breathing space, we are of the view that the underlying risk still lingers surrounding Turkey due to the strength of US dollar and its high exposure to dollar denominated debt. Thus, with the ongoing tightening global liquidity, fight with Washington, the recent ratings downgrades and risk of political meddling, Turkey remains vulnerable. Possibilities for another rate hike during the October meeting remains high on the table.

Source: AmInvest Research - 14 Sept 2018