ECB likely back on course to hike rates in 2019

By Eamon Quinn

The easing of political tension in Italy for the time being will likely mean the ECB remains on course to hike interest rates next year at the earliest, according to a leading firm of economists.

Capital Economics in London said the central bank will cut back fully on its huge bond-buying programme by the end of the year “and will refrain from raising rates until September 2019”.

The economists said any flare-up in the crisis may yet persuade the ECB to extend its bond-buying programme and “it may strengthen its guidance that interest rates will be kept on hold for a long time beyond the end of its asset purchases”.

Meanwhile, the latest manufacturing survey said Irish factories’ output expanded to a three-month high, boosted by orders both home and overseas.

The Investec manufacturing purchasing managers’ index showed Irish factory output improved in May, even as the pace of jobs recruitment fell and input prices such as oil, plastics, and metal rose sharply.

“Notwithstanding this margin pressure, firms remain very upbeat on their prospects, with close to three-fifths of panellists expecting to see a rise in output over the coming 12 months,” said Investec.

“This confidence was linked to expectations of increases in new orders, particularly from overseas.”

European shares enjoyed a reprieve, waving aside lingering political questions, after Italy’s populist parties scraped together a new government to end a three-month deadlock while Spanish Prime Minister Mariano Rajoy was ousted.

The Stoxx 600 advanced almost 1%, paring its biggest weekly drop in more than two months. The biggest losers from the selloff rebounded the most yesterday, with banks outshining all other sectors. The Italian benchmark headed for its biggest gain since February.

Irish banks joined in the rally. AIB shares rose almost 4% and Bank of Ireland advanced by more than 2.5%. Both are, however, down from the start of the year. Shares in Permanent TSB rose over 1%, and remain sharply lower from the start of the year.

“European equities have risen and bond yields have fallen as investors welcome an apparent end to the political uncertainty in Italy,” said Chris Payne, managing director at GWM Investment Management.

“With the impact Italian politics had on markets earlier in the week, we are expecting the situation in Spain to provoke a similar reaction.”

The political sagas in Italy and Spain came to an end over the past day, bringing relief to global markets. In Italy, tumultuous political negotiations concluded with a new populist government, while in Spain, a vote in parliament saw Socialist leader Pedro Sanchez take over from Mariano Rajoy.

Even the threat of an escalating global trade war seemed to be doing little to dent the relief rally. Yet the worries that rocked markets persist.

If the new Italian administration escalates its rhetoric, market tensions will likely resurface and potentially harm economic confidence, said UBS. In Spain, Mr Sanchez will govern thanks to an alliance that includes anti-establishment group Podemos and the Catalan separatists who were trying to break up the state six months ago. Madrid’s Ibex Index extended gains.

Additional reporting Bloomberg

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