Eurozone: Will the economy withstand a normalisation of its monetary policy? - Natixis

Patrick Artus, Analysts at Natixis, suggests that they think that the ECB will start normalising its monetary policy in 2018 by exiting quantitative easing.

Key Quotes

“Will the euro-zone economy withstand this normalisation? This poses a number of questions:

• What effect will the end of quantitative easing have on long-term interest rates in the euro zone? We think that 10-year interest rates will increase by 60 to 80 basis points. The ECB will not yet start shrinking the size of its balance sheet in 2018, and the euro zone has a sizeable savings surplus, which could limit the rise in interest rates;
• Corporate profitability in the euro zone is high, and the corporate self-financing rate is higher than 100%, which should curb the effect of the rise in long-term interest rates on corporate investment;
• The recovery in residential real estate in the euro zone is linked to the very low level of long-term interest rates. An overly sharp rise in long-term interest rates would weaken residential investment, but as mentioned above they are unlikely to rise too sharply;
• Could there be another public debt crisis? In some countries (Italy, Portugal), long-term interest rates will become much higher than growth. But these countries no longer have external deficits, on the contrary. They are therefore now financing their fiscal deficits domestically, which is stabilising.”

“Altogether, there may not be reason to be overly concerned about the end of quantitative easing in the euro zone.”