Eurozone: solid growth seen across multiple sectors, ECB to raise rates in 2019

According to analysts from Wells Fargo, a broad-based expansion is firmly underway in the Eurozone, with consumer, investment and government spending all posting solid gains this year. They see the ECB raising rates sometime in mid-2019.

Key Quotes:

“Economic growth in the Eurozone continued in Q4, with real GDP up 2.7 percent from a year ago. The broad-based expansion is firmly underway, with consumer, investment and government spending all posting solid gains this year. Unemployment has declined in recent months, and disposable income should continue to grow as businesses expand and inflation remains benign. This acceleration in economic activity has convinced the Governing Council that it can dial back its QE program, and we look for the ECB to end its bond buying in late 2018. The Governing Council has stated it will only begin to hike rates after the QE program ends.”

“We look for the ECB to hike its deposit rate in H1-2019 while keeping the overnight interbank rate and 2-week refinancing rate unchanged initially. We forecast that the ECB will then begin a slow process of raising all three policy rates in H2-2019.”

“As the ECB gradually begins to tighten, our currency strategy team looks for continued euro appreciation against the dollar over the coming quarters amid general greenback weakness and eventual monetary policy tightening.”

“While the Eurozone economy is experiencing an upswing in line with the overall global expansion, we must also acknowledge risks to our outlook, including political uncertainty in Germany and Italy, or another sovereign debt crisis similar to the one witnessed in 2010. Although risks are present and policy normalization will likely be slow, we look for the expansion to continue over the next two years, with real GDP rising 2.2 percent in 2018 and 2.0 percent in 2019.”

“Strategy team expects that the euro will continue to trend higher vis-à-vis the greenback in coming quarters, as market participants start to price in the expected tightening measures by the ECB.”

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