Market Economics | Interest Rate Strategy - BNP PARIBAS ...
Market Economics | Interest Rate Strategy - BNP PARIBAS ...
Market Economics | Interest Rate Strategy - BNP PARIBAS ...
You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
Global Inflation Watch<br />
Eurozone HICP: Upward Revisions<br />
Chart 1: GSCI & CPI Food<br />
The past few months have seen an acceleration in<br />
the upward trend in oil and other commodity prices,<br />
in particular soft commodities. A number of<br />
idiosyncratic factors have contributed to these trends<br />
including adverse weather conditions, supply<br />
disruptions and threats of protectionism. But the<br />
increase has been primarily due to fundamental<br />
factors including slack monetary policy and the<br />
closing of the output gap at the global level (for more<br />
on this see “Global Inflation: Ready To Takeoff?”).<br />
The risks to global inflation are high.<br />
In the eurozone, these trends have been<br />
compounded by greater-than-expected strength in<br />
the economic recovery in Germany and higher taxes<br />
in a number of countries which are undergoing a<br />
significant fiscal adjustment.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 2: German Output Gap & Core HICP Inflation<br />
In particular, following a collapse in activity in 2009,<br />
the German economy has been a significant<br />
beneficiary of the rebound in world economic activity.<br />
Growth is likely to be higher than we previously<br />
thought (we revised up our GDP growth forecast for<br />
2011 from 2.7% to 3.5%) and more balanced, thanks<br />
to a greater contribution from domestic demand.<br />
Over time, this recovery will put upward pressure on<br />
domestically-generated inflation.<br />
As a result of the above-mentioned factors, we have<br />
revised up our forecasts for inflation in the eurozone.<br />
We now expect headline inflation to average 2.2% in<br />
2011 (from 1.8% previously) and 1.6% in 2012 (from<br />
1.3%).<br />
In the short term, the main contributors to these<br />
revisions are food and energy prices. Pressure on<br />
core prices should remain limited to those<br />
components for which food and energy are an<br />
important input, such as restaurants and transport<br />
services. But core inflation, forecast to average 0.9%<br />
and 1.1% in 2011 and 2012 respectively, is still<br />
expected to remain contained.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Chart 3: Core HICP – Periphery vs. Core<br />
The continued low level of core inflation is predicated<br />
mainly on wage growth remaining subdued by high<br />
unemployment and tighter fiscal policies. Recent<br />
trends in wages support this view.<br />
Note that the outlook differs significantly between<br />
countries. In particular, beyond a temporary boost<br />
from higher taxes, we believe risks of deflation are<br />
still high in the eurozone’s periphery as a result of the<br />
ongoing adjustment in fiscal and external<br />
imbalances.<br />
Source: Reuters EcoWin Pro, <strong>BNP</strong> Paribas<br />
Luigi Speranza/Eoin O’Callaghan 20 January 2011<br />
<strong>Market</strong> Mover<br />
49<br />
www.Global<strong>Market</strong>s.bnpparibas.com