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93619 CENTRAL BANK WATCH April 2017 Short-term bias Policy rates: International % 9 8 Canada U.S. U.K. Euro Area Aus tralia New Zealand BoC officials continue to push back against market pricing for higher rates this year. Expect the upcoming MPR to balance the positive trend in recent data with still-elevated uncertainty in the outlook and indications that slack in the economy remains. Forecast 7 6 5 4 The Fed’s March ‘dot plot’ was less hawkish than expected but nonetheless indicated a growing consensus to continue scaling back accommodation this year. We look for the next rate hike in June. 3 2 1 0 -1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The BoE’s patience might be tested by rising inflation (indeed, one MPC member already voted for a hike) but we expect signs of a slowdown in the UK economy will keep policymakers on the sidelines this year as Brexit negotiations get underway. Source: FRB, BoC, ECB, BoE, RBA, RBNZ, RBC Economics Research Responding to expectations that stimulus might be scaled back next year, the ECB has been keen to emphasize that monetary policy will remain accommodative as long as underlying inflation remains subdued. The RBA’s tone was a bit more balanced in April, noting stronger growth but evidence of softer domestic conditions. We think there is scope for one more rate cut in the current cycle but not until Q4/17. The RBNZ sounded a bit more positive on the economic outlook in March. We continue to see risk of further easing but have shifted our forecast for a final rate cut to Q4/17. Central Bank policy rates Current United States Fed funds Canada Overnight rate 0.75-1.00 Last 0.50-0.75 March 15, 2017 0.50 0.75 July 15, 2015 United Kingdom Bank rate 0.25 0.50 August 4, 2016 Josh Nye Eurozone Deposit rate -0.40 -0.30 March 10, 2016 Economist (416) 974-3979 [email protected] Australia Cash rate 1.50 1.75 August 3, 2016 New Zealand Cash rate 1.75 2.00 November 10, 2016 CENTRAL BANK WATCH | APRIL 2017 Bank of Canada A stronger-than-expected 0.6% increase in January GDP, built on solid gains in prior months, leading us to boost our Q1/17 forecast to 3.8%. That would make for a third consecutive quarter in which Canada’s economy has outperformed the US. The upcoming MPR should acknowledge strength in recent data and eroding economic slack, but we don’t expect any hint of a tightening bias as the Bank remains focused on external risks. Canadian overnight rate Canadian real GDP growth % Quarter-over-quarter annualized % change 7 8 Forecast 6 6 4 5 2 4 -2 3 -4 2 -6 1 -8 -10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada, RBC Economics Research Forecasted values: 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of Canada, Federal Reserve Board, RBC Economics Research Federal Reserve US GDP growth likely slowed to 1.6% in Q1/17 as consumer spending slowed. However, in the face of solid employment gains, we think that dip will prove temporary helping overall growth return to an above-trend pace this year. Notwithstanding a softer Q1, we expect an improving economic outlook will keep the Fed in tightening mode with two more rate hikes in 2017 and tapering of reinvestment announced later this year. U.S. target rate U.S. real GDP growth % 7 Quarter-over-quarter annualized % change 8 Forecast 6 6 4 5 2 4 -2 3 -4 2 -6 1 -8 -10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Forecasted values: Source: Bureau of Economics Analysis, RBC Economics Research 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of Canada, Federal Reserve Board, RBC Economics Research European Central Bank Improving PMI readings point to growing momentum in the euro area’s recovery; risks around our forecast for another 0.4% gain in Q1/17 GDP are tilted to the upside. Growth is picking up and headline inflation readings are higher but there continue to be few signs of underlying inflationary pressure. We see the ECB remaining in easing mode with QE continuing through the end of this year. ECB Deposit rate Euro area GDP % % change, quarter-over-quarter 7 1.5 Forecast 1.0 6 0.5 5 0.0 4 -0.5 3 -1.0 -1.5 2 -2.0 1 -2.5 0 -3.0 -3.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Eurostat, RBC Economics Research Forecasted values: -1 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: ECB, RBC Economics Research Bank of England After stronger-than-expected growth in H2/16, growth appears to be moderating in early-2017. Softer PMI reading support our forecast for a 0.4% increase in Q1/17 GDP. The BoE is balancing rising headline inflation with expectations of softer growth as Brexit begins to bite. We think the MPC will keep their options open―ready to respond in either direction―before shifting back to an easing bias later this year. Australian and New Zealand Higher commodity prices have helped boost income measures, but overall growth in Australia’s economy remains subdued. With housing expected to slow later this year―easing a key financial stability concern―we see scope for a final rate cut in Q4/17. A more positive tone from the RBNZ points to monetary policy being held steady for now but we expect an under-realization of the central bank’s growth and inflation outlook will ultimately prompt another cash rate cut later this year. % change, quarter-over-quarter U.K. real GDP growth U.K. policy rate % 1.5 7 1.0 6 0.5 5 Forecast 0.0 4 -0.5 3 -1.0 2 -1.5 1 -2.0 -2.5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Central Statistical Office, RBC Economics Research 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Forecasted values: Source: Bank of England, RBC Economics Research Australia and New Zealand inflation Australia and New Zealand GDP growth 2.5 % change, quarter-over-quarter 7 % change, year-over-year Forecast 2.0 6 1.5 Australia New Zealand Forecast 5 1.0 4 0.5 3 0.0 2 -0.5 Australia New Zealand -1.0 -1.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 *2016 Australia GDP is actual Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research Source: Aus tralian Bureau of Statistics, Statistics New Zealand, RBC Economics Res earch The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. ECONOMICS | RESEARCH 2 ®Registered trademark of Royal Bank of Canada. ©Royal Bank of Canada.