Economics: ECB likely to delay the day of reckoning

The European Central Bank meeting on Thursday is shaping up to be a lively one, given last week’s comments from top officials. A remark from chief economist Peter Praet that the ECB will debate whether to end asset purchases later this year, has woken markets up to the possibility that a shift in policy is coming sooner than anticipated.

And it comes after a drubbing in Italy’s bond market and softer economic data had raised some doubts over whether the ECB would, as expected, be able to start tapering its bond purchases this year.

Judging by recent comments from central bankers, discussion about whether to end asset purchases in 2018 will be on the agenda. Given that a shift in policy is now widely expected, whether that announcement comes this month or next is less important.

It worth noting that Thursday’s meeting is taking place in Riga, Latvia, an external one outside Frankfurt that makes a major decision more difficult. The ECB will also provide its latest forecasts for economic growth and inflation, which are likely to be scrutinised for clues on exiting quantitative easing (QE). The forecasts are likely to show faster inflation, but slower growth.

For many economists, tweaks to the ECB’s so-called forward-guidance, which includes its outlook on asset purchases and interest rates, is more likely to come in July than June. It will then likely detail plans to wind up QE by year-end, while tempering market expectations for a rise in interest rates soon.

But some near-term caution is anticipated given a softening in economic data and uncertainty in Italy – the Eurozone’s third-biggest economy.

One way or another Italy is likely to come up, if not at the meeting, then at ECB President Mario Draghi’s news conference. Some calm has returned to Italy’s bond market, but with the new government bent on fiscal expansion and likely collision with the EU, uncertainty emanating from Rome is far from over.

That brings into question the ECB’s role should the bond market buckle again. Latest data show the ECB slowed its purchases of Italian government bonds in May, just as investors were offloading them. The central bank has tried to counter accusations in Italy that it had deliberately bought less Italian debt to influence the formation of a new government.

Italy is one of the biggest beneficiaries of QE and tapering couldn’t come at a worse time for a beaten-down bond market.

Economics: Fed lifts rates amid stronger inflation, drops crisis-era guidance

The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the US central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75% to 2.00%, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signalled it would tolerate inflation above its 2% target at least through 2020.

The ongoing economic expansion coupled with solid job growth has pushed the Fed to raise rates seven times since late 2015, rendering the language of its previous policy statements outdated.

Policymakers’ fresh economic projections, also issued on Wednesday, indicated a slightly faster pace of rate-increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously. They see another three rate-increases next year, a pace unchanged from their projections in March.

Fed Chair Jerome Powell also announced the central bank would start holding news conferences after every policy meeting next year, which means a total of eight in 2019. The Fed chief currently holds four such events each year.

Economics: Irish new dwellings completed forecast to have posted single-digit annual increase in the first quarter

Later this morning, the Central Statistics Office will release the official new dwellings completed data for the first quarter. There was a total of 3,896 new dwellings completed in the opening quarter of 2017. In the first two months of this year, 3,158 dwellings were completed, an annual increase of 26%. However, the adverse weather in March is likely to have seen a slowdown in activity that month.

We are predicting a total of 900 completions for March and 4,058 for the first quarter, representing a year-on-year rise of 4.2% on the first quarter of 2017.

Economics: Irish “bad bank” NAMA raises forecast surplus to €3.5bn

Ireland’s state-run “bad bank”, the National Asset Management Agency (NAMA), yesterday forecast it would post a lifetime surplus of €3.5bn, up from an earlier estimate of €3bn.

Seen as a major liability for Dublin’s finances when it was established in 2009 during a crash that cut property values in half, NAMA has since ridden a surge in demand for Irish real estate.

NAMA used €32bn of senior and junior debt to rid local banks of €74bn worth of risky property loans and last year redeemed the final tranche of government-guaranteed senior debt three years ahead of schedule.

The agency has been given additional roles by the government, including building 20,000 homes on land it controls and building a new business district dubbed the “Canary Wharf of Dublin”.

In its latest annual report published on Wednesday, NAMA reported an after-tax profit of €481m for 2017.

Alan McQuaid (14/6/18)