Heteronomics Archive

February 27, 2024

Why Neutral Rates are High

Market interest rates still price a mean reversion, albeit with less imminence than earlier this year. Resilient economic data imply the prevailing neutral rate is higher.
Slow GDP growth suggests opportunity is low, depressing the consensus view of neutral, but rising time preferences in the post-pandemic regime would also drive rates up.
We find reasons for this structural shift and are mindful that another regime change is unlikely outside of a recession. This still provides a hawkish anchor to our forecasts.

By Philip Rush

February 22, 2024

The final EA HICP inflation print confirmed the flash’s slight slowing to 2.8% for Jan-24. Housing energy price base effects offset most of the negatives in food and transport.
Underlying inflation measures are slowing y-o-y, but the monthly impulse moved sharply higher in some cases, including the median for Germany and Spain.
Split signals on underlying pressures confuse the optimal policy response. Sustaining higher numbers should delay cuts, but a sub-2% convergence would mean the opposite.

By Philip Rush

February 01, 2024

Flash EA inflation matched consensus expectations for the first time since Jul-23 as it slowed by 18bps to 2.75%. The level is close to views held throughout the past year.
Services inflation remains uncomfortably persistent for the ECB and little changed at 3.98% in Jan-24. High wage inflation is stoking this domestic inflationary source.
The ECB wants to see more progress in the disinflationary process before cutting. Sticky service prices don’t help that, further damping the likelihood of an imminent rate cut.

By Philip Rush

January 30, 2024

The Euro area appears to have skirted a technical recession with a flat GDP in Q4. Even if revised down, the activity trend has been broadly stagnant for five quarters.
Only Ireland is in a proper recession, but Germany’s size means it subtracted more from the EA in Q4. Surveys have been recovering and remain robust for employment.
Resilient demand relative to supply suggests policy is not overly tight, which should discourage rate cuts from matching the deep mean reversion that markets price.

By Philip Rush