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    New Normal: low interest rate environment remains


    •    Cental banks push “step-like” rate hike cycles
    •    Confident outlook in CE/SEE
    •    Euro area’s economy is better than its reputation

    On 28 September 2016, Raiffeisen RESEARCH, an orgaizational unit of Raiffeisen Bank International AG (RBI), published its two capital market strategies „Central & Eastern European* Strategy“ and „Global Markets“ for the fourth quarter of 2016. This time, Head of Global Research Peter Brezinschek put a special focus on the current low interest rate environment, which in his opinion will continue to remain for a longer period of time.

    “Ever since the Lehman bankruptcy in 2008, central banks have been operating in crisis mode and are constantly emphasizing the dangers of a too prompt turning away from the ultra-expansionary monetary policy. This is mainly due to the fact that the mandate of central banks has visibly expanded in recent years: In addition to price stability, especially the stability of the financial sector as well as growth and employement have increasingly come into focus. Several objectives call for more – sometimes even ‘exotic’ – instruments, which in turn must be finely balanced. In addition, the inflation targets of up to 2 per cent are no longer the maximum, but interpreted as an average value. This complex environment means that the central banks worldwide react later and more infrequent, which results in ‘step-like’ rate hike cycles. Over the past quarters, this was demonstratively proven by the US Federal Reserve (Fed), as rate hikes are already significantly delayed”, says Brezinschek.

    In the US, the analysts of Raiffeisen RESEARCH expect a rate hike only in December, followed by a phase of re-evaluation, which would go along with the next rate hike in mid-2017. On the other side of the Atlantic, the analysts expect the European Central Bank (ECB) to announce an extension of the bond purchase program (Quantitative Easing, QE) by December at the latest. A reduction in volume is likely to begin only in the second half of 2017. Thus, a change in the euro area’s interest rates is not anticipated before the second half of 2018.

    Impact on currency markets

    The more cautious interest rate policy in the US gave the Euro some air. The different trend of Fed and ECB should support the US dollar. After a strong comeback, the Russian ruble is likely to remain fairly stable against the US dollar in the coming months. Hence, the weaker EUR/USD results in an ongoing appreciation of the Russian ruble against the Euro. The high correlation between the Russian ruble and the oil prices remains. The Swiss franc is expected at EUR/CHF 1.10 -- still without major fluctuations. The British pound continues to face devaluation risks also in 2017. The CEE currencies remain quite stable against the Euro, only the Polish zloty fluctuates more due to political decisions.

    Impact on capital markets

    Due to the generally continued high liquidity supply of central banks worldwide and the persistence even at negative nominal money market rates, the analysts of Raiffeisen RESEARCH see prospects in riskier asset classes, such as corporate bonds and equities, in the coming three quarters more optimistic than last. They emphasize, however, Europe and Japan ahead of the US. Where 10-year maturities have only limited upside potential, the yield outlook for the next twelve months was also significantly revised. CEE countries capitalize on the great flood of liquidity on the equity side as well as on the bond side. However, an a twelve month basis, 10-year government bond yields should trade a little higher. By contrast, Russia and Turkey offer a comparatively high coupon and seem attractive.

    Oil prices remain stable

    According to the analysts of Raiffeisen RESEARCH, oil prices are likely to remain stable between USD 45 and 50 per barrel of Brent until early 2017, which should lead to a globally higher inflation rate in the fourth quarter. For the full year 2017, oil prices are still expected to rise to an average of USD 55 per barrel of Brent, but only given that in the second half of 2016, the currently well-filled global oil stocks are emptied and that Saudi Arabia is not further turning up its oil tap.

    Confident outlook in CE/SEE

    Obviously, the global liquidity flood also has an impact on the CEE region. Although growth is not primarily due to the monetary policy, the monetary expansion in countries such as Hungary or Romania does contribute very well to a friendly business climate. The low interest rate policy in large parts of CE and SEE gets more leeway due to the ultra-expansive position of the ECB. However, the historically low interest rates on the money market and partly also on the capital market are only possible because most price developments throughout the region are declining. Nevertheless, the downward spiral of prices, that has lasted since 2014, has no impact on wage developments, which have been growing nominally by an annual average of around 4 per cent (in Hungary even significantly higher). Given the noticeable employment growth and at the same time significantly decreasing unemployment rates, private consumption remains the growth driver in the CE/SEE region.

    In CE, the 2016 outlook for GDP growth remains stable at 3.0 per cent, while expectations for SEE were increased by 0.8 percentage points to 4.0 per cent. The forecasts for the GDP growth rates in Croatia (2.3 per cent), Bulgaria (3.0 per cent) and Romania (5.2 per cent) are now significantly better than last quarter. For 2017, Raiffeisen RESEARCH currently expects continued stable growth of 3.3 per cent in CE and SEE respectively.

    In Russia and Ukraine, the gradual economic recovery continues. “We continue to believe that the Russian economy will shrink in 2016 by 0.5 per cent and expect 1.0 per cent growth next year. In Ukraine, we have to revise our forecast for 2016 from 1.5 per cent down to 1.0 per cent, but are still expecting 2.0 per cent for 2017. Belarus suffers significantly from the weak Russian demand, which made us correct our estimate for 2016 from minus 2.0 percent to minus 3.0 per cent and from 1.0 per cent to 0 per cent in 2017,” says Brezinschek about the developments in the EE region.

    Euro area’s economy is better than its reputation

    “Paradoxically, the mood in Europe is worse than its growth figures are acutally suggesting,” summarizes Brezinschek the economic outlook for the euro area. Although there are constantly reports about economic concerns, the figures on an annual basis in Europe are quite acceptable. Despite the Brexit, which seems also formally to be shifted even further in the future, the impact outside the United Kingdom has so far been manageable. For 2016, Raiffeisen RESEARCH expects a GDP growth of 1.6 per cent in the euro area, which is mainly supported by strong domestic factors. Also the US is expected to accelerate growth in the second hal of 2016, which should be preserved with 2.4 per cent in 2017.

    * Central and Eastern Europe (CEE) is composed of the regions of Central Europe (CE) with the Czech Republic, Poland, Slovakia, Slovenia and Hungary, Southeastern Europe (SEE) is composed of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania and Serbia as well as the region Eastern Europe (EE) with Belarus, Russia and Ukraine.


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