Market Economics | Interest Rate Strategy - BNP PARIBAS ...

On the basis of the relationship between pay trends
and the evolution of slack in the labour market, the
bulk of the downward pressure on labour cost growth
in the eurozone as a whole is probably behind us
(Chart 3). But the lags are long and the persistently
high level of the unemployment rate does not point to
a pick-up in wage growth any time soon.
Chart 1: HICP Forecasts(% y/y)
On the basis of the assessment in the latest Monthly
Bulletin, this is a view which the ECB seems to share
– see the extracts in Box 2.
The view on labour cost developments expressed in
December's ECB Monthly Bulletin was benign. It was
liberally sprinkled with terms like 'modest', 'moderate'
and 'contained'. We wondered whether this would
change in January's Bulletin, in line with the greater
concern over inflation risks expressed at the press
conference a week before. But there was no sense of
an increased threat of second round risks.
Managing expectations
Regarding inflation expectations, the ECB’s current
view is that they remain well anchored. On the basis
of the information available to the ECB, this is hard to
argue against. Implied breakeven inflation rates have
been hovering in the region of 2% recently, with no
sign of any upward drift.
The ECB’s quarterly Survey of Professional
Forecasters (SPF) has also demonstrated very
stable long-term inflation expectations (though there
is some circularity in this as inflation expectations are
anchored because the ECB is expected to act in
such a way as to deliver inflation in line with its below
but close to 2% price stability definition in the long
run). The ECB’s next SPF will be released on 10
February.
There has been some upward drift in households’
inflation expectations. The surveys compiled by the
European Commission, both forward and backward
looking, have been trending higher since the autumn
of 2009. But the current readings are not elevated in
comparison with the past: for example, the survey of
price perceptions over the year ahead is more than
twenty percentage points below its average cycle
peak since the mid-1980s. The ECB considers this
particular measure of inflation expectations to be the
least credible as it has a short time horizon, of just a
year, and is therefore very sensitive to short-term
price developments.
No rush…
Our assessment of second-round risks and inflation
expectations underpins our forecast that the ECB,
while more sensitive to upside risks to inflation and
likely to stay that way going forward, will not raise its
refinancing rate this year.
Source: Reuters EcoWin Pro
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Chart 2: Compensation Trends
Negotiated Wages (% y/y)
Compensation per Employee (% y/y)
Hourly Labour Costs (% y/y)
97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Chart 3: Unemployment & Labour Costs
0.5
2.0
Unemployment Rate
(1-Yr Change, 18-Mth Lag) 0.0
2.5
-0.5
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Reuters EcoWin Pro
Hourly Labour
Costs (% y/y, RHS)
The current circumstances are very different from
those in summer 2008, when the ECB felt compelled
to hike rates in what was a difficult economic and
financial environment. Then, headline inflation
peaked at over 4%, almost twice the current level,
and had been well over 2% for almost a year before
the rate hike was delivered (in July). The deviation
from target was much bigger and much more
persistent, so inflation expectations were much more
at risk of becoming unanchored then than now.
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Ken Wattret 20 January 2011
Market Mover
19
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