S&P: Expect interest hikes next year

By Eamon Quinn

Rising consumer prices means the ECB is on course to hike interest rates sometime in late 2019, even though borrowing costs will come too early for Greece and Italy, S&P Global Ratings has said.

Senior economists Marion Amiuot and Jean-Michel Six said the Central Bank is on course to phase out by the end of this year its huge programme of buying corporate and sovereign bonds, which has kept all types of borrowing costs, including mortgage and household borrowing, as well as company and government yields, at low levels since the economic crash.

The ending of the bond-buying purchases will pave the way for an increase in retail rates in the third quarter of next year, they predict, despite recent concerns economic growth was slowing sharply across the eurozone.

The ECB will be emboldened because spare capacity in many eurozone economies is being used up, according to S&P. However, the “one size fits all policy” means rising rates will “inevitably” come too early for Greece and Italy.

In weighing its decision to hike rates, “much more important is the reason behind accelerating inflation: Price pressures have been slowly building because of capacity constraints,” said the S&P economists.

Higher energy costs will boost eurozone inflation to 1.7% in 2020, “giving the ECB enough confidence to raise rates in third-quarter 2019”, they said.

Eurozone growth will slow to 1.6% in 2020, down from 2.6% last year.

“The eurozone output gap seems to have closed, confirming our view that the economy is unlikely to return back to last year’s growth rates and that inflationary pressures are building.

Further reductions in labour market slack are feeding into higher wages. Compensation per employee was up by an annual 1.9% in first-quarter 2018, its highest pace since mid-2012. Plus, recent wage agreements in Germany and France point to further wage increases.

“What’s more, firms are increasingly citing equipment as a key factor limiting production, while demand constraints are at their lowest since 2001.

In the European Commission’s business sentiment survey, firms also report an improvement in their domestic competitive position, indicating they might now be in a better position to raise prices,” S&P said.

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