Ulster Bank Weekly Economic Commentary - Simon Barry Chief Economist Republic of Ireland
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Ulster Bank Weekly Economic Commentary
Simon Barry
Chief Economist Republic of Ireland
17th December 2021
To subscribe or unsubscribe please contact UlsterBankEconomics@ulsterbank.com
Slide 1Ireland: House price inflation accelerates again, leaving it at a 6½ year high
The October reading of the CSO’s Residential Property Price Index
(RPPI) showed a further acceleration in the annual rate of Irish house
price inflation which now stands at 13.5%y/y, up from 12.4% in
September. This marks a 6½ year high for price inflation and follows a
sustained period of acceleration which has seen the annual pace of
price growth pick up for 14 consecutive months now from the August
2020 low point of -0.9%. This strength reflects dynamics on both the
demand and supply sides of the market. On the demand side, buoyant
labour market conditions leave aggregate compensation of employees
(i.e. the total income from employment for households) running over 6%
higher than 2019 levels over Q1-3 this year, while on the supply side,
housing completions, though more resilient than expected in some
quarters, have been restrained below 2019 levels (when 21,000 new
units were completed) reflecting the impact of public health measures on
construction activity. As we have noted previously, however, there has
been a significant pickup in the supply pipeline over the course of this
year, with some 31,000 units having been commenced over the 12
months to October, up from 17,000 in March. We continue to expect this
prospective increase in supply to exert a moderating influence on the
rate of annual house price inflation, and anticipate that it may ease to a
mid-single digit pace by Q4 of next year. Nonetheless, the health of
momentum in price growth currently on display (the monthly gain of
1.4% m/m was the strongest October for prices since 2005) leaves the
risks tilted to the upside, notwithstanding the shadow being cast over the
economic outlook by the Omicron variant with the week ending with the
news that the government is giving consideration to a possible pre-
Christmas tightening of public health restrictions in the hospitality and
leisure areas.
Slide 2International Economies: BoE hikes, Fed signals it’s likely to follow next year
while ECB says higher rates very unlikely in 2022
An interesting and important week in the world of monetary policy saw the Fed and ECB confirm a reduction in
the pace of stimulus provision, while the UK went a step further by hiking interest rates in a first (and not fully
expected) step of outright stimulus withdrawal. Fed Chair Powell remarked that recent stronger-than-expected
readings of consumer price inflation, wage costs and employment served as a tipping point for the Fed in
underpinning a hawkish pivot which has resulted in a decision to proceed with a faster pace of tapering its asset
purchases. Wednesday’s update means an end to purchases is likely by March, and more importantly it looks
like interest rate hikes could quickly follow thereafter (possibly by May/June) as the December dot plot featured
a median of 3 rate hikes projected for next year (from 1 in September), with a further 3 to follow in 2023. The
Bank of England’s asset purchases have now ended as of this week, and yesterday’s meeting concluded that a
small increase in Bank rate was now warranted in the context of a tight and still-tightening labour market, the
strength of current underlying inflationary pressures (BoE staff now expect CPI inflation to reach around 6% by
April), some signs of persistence in domestic cost and price pressures and an expected medium-term inflation
overshoot in the absence of some modest policy tightening. For its part, the ECB is heading in a broadly similar
direction to the Fed and BoE, but at much slower pace. It continues to think that more monetary
accommodation is still needed given an updated staff economic projection that continues to have inflation below
the 2% target at its end point (now seen at 1.8% at end-24, from an end-point projection of 1.6% in September).
So in yesterday’s update the ECB laid out plans that reflect an intention to maintain net asset purchases until at
least October next year. However, with the ECB highlighting progress on economic recovery and towards its
inflation target, it also decided on a progressively lower pace of asset purchases, targeting €20bn per month by
Source: ECB Staff Macroeconomic next October, from a roughly €80bn+ pace of late as it confirmed that it plans to end its Pandemic Emergency
Projections, December 2021 Purchase Programme (PEPP) in March as previously signalled. President Lagarde again did not provide a clear
explanation as to why the ECB was reducing the pace of stimulus provision when its own analysis & projections
show inflation failing to meet its 2% target over the medium term – an important area where ECB messaging and
communication continues to disappoint. But in fairness, the ECB President was clearer on her view on the
interest rate outlook where she reiterated that “under the present circumstances…it is very unlikely that we will
raise interest rates in the year 2022”. All three central banks highlighted the uncertainty injected into the outlook
by Omicron, though it’s fair to say that it received more attention in the BoE and ECB updates (the ECB for
example was explicit in stating that it could resume PEPP purchases if needed, while the BoE flagged that it
would it give fuller consideration as part of its February forecast round) than at the Fed where Powell seemed -
perhaps somewhat surprisingly - comparatively unperturbed, for now at least.
Slide 3Financial Markets: BoE’s early hiker status lends modest support to sterling
Among the main developments for markets to digest this week was the
surprise BoE rate hike. A 15bps increase in UK Bank rate represented a
surprise relative to both analyst expectations and to what had been
priced into the front end of the UK interest rate curve, with a majority of
City analysts (34 out of 42 in the Bloomberg survey) in the no-change
camp largely on the view (to which we also subscribed) that Omicron-
related uncertainty would prompt a wait-and-see approach from the BoE.
Its decision to go ahead anyway and start taking back a little of the
emergency stimulus (a 15bps hike is after all a pretty modest amount,
and still leaves interest rates at near-zero levels of 0.25%) isn’t
unreasonable given the improved state of the UK economy and its labour
market and the strength of inflation pressures. But, along with the signal
that yesterday’s hike is likely going to be followed by some modest
further tightening i.e. further rate hikes (a perspective endorsed in
comments today from Bank Chief Economist Huw Pill), one resulting
notable market move this week has been the renewed upward pressure
on UK market interest rates and yields, both in absolute and relative (to
US/EZ) terms. 2-year UK swap rates have risen by over 10bps on the
week, with their EZ and US equivalents little changed to slightly lower
reflecting less surprising outcomes from the Fed and ECB updates
(albeit that we were struck by the conviction in Powell’s hawkish
messaging by which we were somewhat surprised). In turn, this
affirmation of the BoE’s early hiker status (in this group of 3 major central
banks at least) has provided some support for sterling on the exchanges,
with the pound ending the week with modest 0.2% gains against both the
dollar and euro.
Slide 4Currency and Interest Rate Market Trends
Slide 5Market Monitor
Foreign Exchange Markets Interest Rate Markets
Latest weeklyΔ, % Latest (%) weeklyΔ, bps
EUR/GBP, £ 0.851 -0.3 EUR 3 Month Euribor -0.589 -0.1
GBP/EUR, € 1.176 0.3 2 Year Swaps -0.37 -1
EUR/USD, $ 1.130 -0.1 5 Year Swaps -0.14 -2
GBP/USD, $ 1.329 0.1 10 Year Swaps 0.09 -3
EUR/JPY, JP¥ 128.1 -0.2 GBP 3 Month Libor 0.222 13.9
GBP/JPY, JP¥ 150.6 0.0 2 Year Swaps 1.08 11
USD/JPY, JP¥ 113.4 -0.1 5 Year Swaps 1.10 4
EUR/CHF, CHF 1.041 -0.1 10 Year Swaps 1.00 1
USD 3 Month Libor 0.213 1.4
Stocks & Commodities 2 Year Swaps 0.85 -2
Latest weekly Δ, % 5 Year Swaps 1.25 -11
ISEQ 8,104 #VALUE! 10 Year Swaps 1.44 -13
STOXX Europe 600 477 #VALUE!
FTSE 100 7,261 #VALUE! Note: the data in the tables are indicative only and are sourced
from Bloomberg. Latest data are updated as at the time of
S&P 500 4,669 #VALUE! publication. “weekly Δ” refers to the change from the previous
Dow Jones 35,898 #VALUE! week’s closing levels.
Nasdaq 15,180 #VALUE!
Ulster Bank Cost of Funds Rate (365 day count) = 0.56%
NIKKEI 29,066 #VALUE! Euro rates are quoted in 360-day convention.
OIL (London Brent) 75.0 #VALUE! To convert to 365 day count, divide by 360, & multiply by 365
Gold 1,797 #VALUE!
Slide 6The Week Ahead: Consumer confidence in focus at home and abroad
The economic calendar for the final week before Christmas has a
decidedly holiday-season look to it, particularly on this side of the
Atlantic. At home, a bare-looking slate lacks any top-tier economic
releases, though the continued focus on inflation pressures means
that the November reading of the Wholesale Price Index will be of
some interest, particularly in relation to the latest estimate of building
and construction materials cost price inflation which hit a record high
of over 15% y/y in October. We may also get a December reading of
the KBC measure of consumer confidence. Having recovered back
to pre-pandemic levels (and also back in line with its long-run
average), the headline sentiment measure ticked lower in November,
and it wouldn’t be a surprise to see some further slippage in
December given concerns about the Omicron variant. And a similar
outcome seems likely for the December reading of the European
Commission’s consumer confidence measure for the wider
Eurozone. In the UK, we get November estimates of the government
budget balance while the Lloyds Business Barometer for December
will provide a more timely glimpse on business confidence, with the
drops in this week’s UK PMIs clearly pointing to the likelihood of a
meaningful Omicron-related drag on sentiment. The US calendar
also features December consumer confidence estimates (from the
Conference Board), while there will also be interest in the latest
trends in business capex and consumer spending, which come via
Durable Goods Orders and Personal Income & Spending data
respectively, with the latter also providing a November update on the
Fed’s preferred measure of inflation the core PCE deflator.
Slide 7Economic calendar for the week commencing December 20th
Ireland / Eurozone UK US
Monday
09:00 – Balance of Payments Current Account 15:00 – Index of Leading Indicators (Nov)
(Oct)
Tuesday
11:00 – Trade Statistics (Oct) 00:01 – Lloyds Business Barometer (Dec) 13:30 – Balance of Payments Current Account
(Q3)
15:00 – Consumer Confidence (Oct) 07:00 – Public Finances (Nov)
Wednesday
11:00 – Wholesale Price Index (Nov) 07:00 – GDP (Q3 f) 13:30 – GDP (Q3 f); Chicago Fed National Activity
Index (Nov)
15:00 – Conference Board Consumer Confidence
(Dec); Existing Home Sales (Nov)
Thursday
(tbc) 00:01 – Consumer Confidence (Nov) 13:30 – Jobless Claims; Personal Income &
Spending incl PCE Deflator (Nov); Durable Goods
Orders (Nov)
15:00 – Uni of Michigan Consumer Sentiment
(Dec-f)
Friday
The Calendar uses Irish local time
Slide 8Important Information
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change without notice. The information contained herein should not be construed as advice, and is not intended to be construed as such.
This publication provides only a brief review of the complex issues discussed and recipients should not rely on information contained here
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information and disclaim all liability for use the recipient or their advisors make of the information.
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