S&P’s: financial conditions in the Eurozone take a slight turn for the better. What to expect from the ECB

8 years ago - Published in Finance, Fundamental Analysis

Financial data over the past three weeks are pointing to an easing in financial and monetary conditions in the eurozone, after turmoil at the start of the year. Standard & Poor's economists say that the past three weeks' worth of financial data indicate that the eurozone recovery is still on track, boding well for consumer spending and investment. 
"Yet, economic indicators have started to depict a less positive outlook, with growth momentum slowing in the first quarter," said Standard & Poor's Economist Sophie Tahiri, in the report "Financial Conditions In The Eurozone Take A Slight Turn For The Better"
 
Global equity prices have recovered to some extent from their mid-February lows. The upturn in oil prices helped to improve investor sentiment. This led to a decline in eurozone sovereign bond yields, especially for the periphery countries, erasing some of the increase since the start of the year. The 
slight reduction in uncertainty led to depreciation of the euro's effective exchange rate. 
 
The European Central Bank's January lending report also brought some positive  news, suggesting that the expansionary monetary policy is having positive effects. Looking at flows, lending to the real economy rose €29 billion in January, more than reversing the large and unexpected fall in December 
primarily due to a collapse in corporate lending in the Netherlands. 
 
While monetary and financial conditions have improved somewhat recently in the eurozone, economic conditions as depicted by key activity indicators, notably Purchasing Managers indices, have started to turn less positive and show a loss in momentum in GDP growth in the first quarter of the year. What's more, inflation dynamics have been weaker than generally expected. 
 
In this context, Standard & Poor's economists expect the European Central Bank (ECB) to make a further reduction in the deposit rate to -0.5% from -0.3% (possibly associated with a tiered deposit rate scheme, as pioneered by Danish and Swiss central banks and recently introduced by the Bank of Japan), and perhaps a modest increase in monthly asset purchases, to be announced at its next meeting on March 10.