Contained US inflation and disappointing retail sales, the SNB maintained the status quo, reinforced financial supervision in China

Macro Highlights - 3/20/2018

In short
  • In the US, moderate inflation growth and weak retail sales in February could contribute to stabilising inflation expectations
  • The SNB maintained its key rate at -0.75%. It also revised its inflation forecasts downward, supporting our scenario that it should continue its accommodative policy in 2018
  • In China, a new regulatory body will be in charge of the supervision of banking and insurance activities, while the People’s Bank of China will be granted new legislative powers

United States – core inflation was flat at 1.8% and retail sales disappointed once again

February inflation figures confirmed that inflationary pressure has remained contained in the United States. Over one month, both the headline CPI and core CPI (i.e. excluding food and energy) rose 0.2%. Core inflation thus remained flat at 1.8% while overall inflation accelerated at a moderate pace, up from 2.1% in January to 2.2% in February (see right-hand chart). For services, the main sub-components, such as housing, medical care and transport, remained stable in February. Only some goods prices, such as apparel and second-hand cars, saw a rise in February.

While consumer confidence continued to climb beyond pre-crisis levels - the University of Michigan index reached 102 in March, a 14-year high - retail sales disappointed once again in February. In current prices, they were down 0.1% over one month, while core retail sales (excluding food, automobiles, building materials and gasoline) increased by 0.1% vs. 0.4% expected by the consensus. Year-on-year, growth in overall retail sales was flat at 4%, vs. 5.4% on average in Q4 2017. Year-on-year growth in core retail sales was up from 3.8% in January to 4.2% in February, but also remained below the Q4 2017 average of 4.8%. Sales of home furniture, healthcare products and gasoline were down year-on-year in February. Note that, despite strong confidence, growth in real wages remains very low at only 0.4% y-o-y in February, in line with the average of 2017, also at  0.4%. Moreover, the rise in the savings rate, from 2.5% of disposable income in December to 3.2% in January, also weighed on the consumption trend at the start of 2018.

According to our scenario, moderate inflation growth and weak consumption is likely to enable the Fed to continue its monetar y tightening at a gradual pace. We maintain our forecast that the Fed will raise its fed funds rate three times in 2018, each time by a quarter notch, taking it from 1.50% to 1.75% on 21 March, then to 2.25% by the end of the year.

Following its monetary policy meeting of 15 March, the Swiss National Bank (SNB) maintained the interest rate it charges on sight deposits at -0.75% and reiterated that it would continue to intervene on the currency market if necessary.

Switzerland – the SNB maintained its monetary policy and revised its inflation forecasts downward

The SNB opted for a dovish tone in its press release. It highlighted that, since its December meeting, the franc has appreciated slightly against its basket of currencies, notably as a result of the weakening of the dollar. In addition, it stated that the franc was still highly valued.

Thus, despite remaining confident with regard to the economic outlook – it maintained its estimate of GDP growth at “around 2%” for 2018 - the SNB revised its inflation forecasts for 2018 and 2019 downward due to the recent appreciation of the franc. It now anticipates inflation at 0.6% on average in 2018 and at 0.9% in 2019 (vs. 0.7% and 1.1% previously). Moreover, the SNB also revised its inflation forecasts downward for the first three quarters of 2020, continuing to anticipate that inflation will remain below its target of 2.0% up until the end of H1 2020.

Analysis and implications:

  • As we expected, the SNB opted for the monetary status quo. Furthermore, the downward revision of its inflation forecasts backs our scenario according to which the SNB is unlikely to be in a rush to exit its accommodative monetary policy.
  • We continue to anticipate that the Swiss National Bank is likely to ensure that its monetary policy does not significantly diverge from that of the European Central bank (ECB) in order to maintain a stable Swiss franc/euro exchange rate. Thus, while we expect the ECB to keep its key rates at the current levels in 2018, we also anticipate that the SNB will maintain its interest rate on sight deposits at -0.75% during the year.

China – the national people’s congress continues and strengthening of financial supervision

During the National People’s Congress, the Chinese government announced on 13 March the merger of the regulatory bodies of the banking and insurance sectors, the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC). The new regulatory body thus created will report directly to the State Council and will have the task of reinforcing financial supervision and preventing systemic financial risks from arising in either sector. This trend stems from the necessity for China to have greater coordination and centralisation of its regulatory bodies in a context of increasing integ ration and higher complexity of its financial system. The financial turbulence in the summer of 2015 had already highlighted this need for coordination. This merger should reduce the regulatory inefficiencies and deficiencies resulting from sometimes poorly defined responsibilities among several regulatory institutions, which had enabled some financial institutions to benefit from regulatory arbitrage, synonym of an increase in financial risk.

In relation with this merger, and in addition to setting the country’s monetary policy, the People’s Bank of China (PBoC) has been granted new legislative powers. It will now be able to draft laws and regulations previously assigned to the CBRC and CIRC, with a view to the prudential supervision of the financial sector. This strengthening of the powers of the PBoC echoes the adoption in 2016 of a macro-prudential framework to assess the risks of the financial system and analyse the soundness of financial institutions, notably with regard to capital and liquidity requirements. This framework could also be broadened to incorporate other sources of shadow financing or mortgage financing in its analysis.

These developments are in line with Beijing’s objective, launched in 2017, to have better management of financial risks in China and control the level of indebtedness in the country, notably in the shadow banking segment. Thus, after the peak of CNY2,900 billion in new banking credit outstandings reached in January 2018, this figure was normalised at CNY840 billion in February. Yearly growth in banking credit was 12.8% in February, thus coming back in line with the pace recorded in Q4 2017. Newly issued credit on the shadow banking market continued to slow in February. As a result of this stricter regulatory stance, wealth management products, which have a high risk profile and are linked to shadow financing, grew by only 1.7% in 2017, compared to close to 50% growth in 2014 and 2015.

Furthermore, the Congress approved the appointment of Xi Jinping as China’s President, and Wang Qishan – former Secretary of the Central Commission for Discipline Inspection and known for his key role in China’s widespread anti-corruption campaign – as Vice President. Lastly, the new central bank governor is Yi Gang, who was appointed to succeed Zhou Xiaochuan following his retirement.


Sophie Casanova - Economist, Central banks,
François Léonet – Economist, Emerging markets,
Lisa Turk - Economist, the United States,