Each year, summer is bookended by two landmark central banking conferences where central bankers, academics and a few members of the private financial sector congregate to discuss new research of interest for monetary policy and compare notes on the outlook: in late June, the ECB Forum held in the windy coastal town of Sintra, Portugal; and in late August in the scenic Rocky Mountains valley of Jackson Hole, Wyoming. This year, the Sintra winds were blustery and relentless, but the discussions as calm, focused and insightful as ever, an apt metaphor for central bankers’ condition these days. Some key takeaways.
While the Federal Reserve (Fed) estimates that uncertainty has eased, its conviction that a tariff-related rise in inflation is looming has hardened. The Committee (FOMC) nevertheless appears to be greatly divided on the balance of risks. We maintain our forecast that there will be no rate cuts in 2025 in light of renewed inflationary pressures combined with insufficiently slowing growth.
The investment required to meet the challenges of competitiveness and energy and technology transition in the European Union is huge, and the need for it is imminent (2025-2030). To this must now be added expenditure to strengthen the European Union's military capabilities. To finance this, the EU must of course speed up its roadmap towards a Savings and Investment Union. But given the urgency, it must also take account of its financial ecosystem and rely on its banks. The postponement of the FRTB (Fundamental Review of Trading Book) until 2027 and the European Commission's legislative proposal on securitisation, expected in June, are steps in this direction.
The vulnerability of ASEAN countries to US trade protectionism has increased significantly since 2017. The US has become a key destination for these countries, which export low-intensity tech products (such as textiles and footwear) as well as medium-intensity tech products (mobile phones) and high-intensity tech products (integrated circuits and semiconductors). Vietnam, Thailand and, to a lesser extent, Malaysia have the largest trade surpluses with the US and are therefore the most exposed to a change in US tariff policy.On 2 April, the US government announced an increase in tariffs on ASEAN countries that goes well beyond simple reciprocity
After being left reeling by the unexpected money-market crisis during its first round of quantitative tightening (QT1), the US Federal Reserve (Fed) intends to manage the second (QT2) with the utmost caution. This means reducing its securities portfolio without creating a shortage in central bank money, in view of the liquidity requirements imposed on banks under the Basel 3 framework. As it is unable to estimate the optimum amount of central bank reserves needed to ensure that its monetary policy is properly implemented, the Fed aims to reduce the stock of reserves to a sufficiently "ample" level.If QT2 is ended too early, it would have to activate its liquidity draining tools in order to limit the downwards pressure on short-term market rates
The FOMC kept the target range for the Fed Funds rate at 4.25% - 4.5% at the 18-19 March meeting, as widely expected. Jerome Powell and the committee have started to price in downward risks to economic activity and upward risks to inflation. In the short term, the stability of the dot plots, the downplaying of the long-term tariff related risks and the consistent message of patience are aimed, implicitly, at providing stability in the midst of the current turmoil. In our scenario, the FOMC is expected to cut the rates quite sharply in 2026.
Resilience of external financing conditions overall. The election of Donald Trump to the White House has caused a rally in the US dollar and revived uncertainties about the external financing conditions of emerging countries. The Argentinean peso, the Turkish lira and the South African rand are among the emerging market currencies that recorded the largest depreciations between November 5th, 2024, and February 24th, 2025, losing 6.3%, 5.7% and 5.2% of their value against the US dollar, respectively. Overall, emerging sovereigns should be relatively resilient against a stronger dollar and the risk of increased investor selectivity towards risky assets. However, all of them are not in the same boat
According to an unpublished study conducted within the Single Supervisory Mechanism (SSM), if it were to perform its functions in the Eurozone, the US supervisor would be stricter, in terms of risk-weighted capital requirements, with respect to the systemically important banks (G-SIBs) established there, than the single supervisor of the Eurozone. The methodology of the exercise on which this conclusion is based has not been shared. However, it seems very complex to define.
On 20 January 2025, Donald Trump once again became President of the United States. With a ‘clear mandate’, the Republican intends to harness his victory by addressing his favourite issues. His return to the Oval Office comes at a time when the dollar is witnessing one of the biggest rallies in history. The real effective exchange rate of the greenback is now at a comparable level to the one which led to the Plaza Accord of 1985, and its appreciation has a high likelihood of continuing. This trend is likely to frustrate the new President, who is keen to denounce weak currencies as penalising US industry
The global economy faces a long list of uncertainties -growth, inflation, interest rates, political, geopolitical, tariffs, etc. When uncertainty is exceptionally high, as is the case today, the economic environment becomes intrinsically unstable and may evolve suddenly and drastically. This acts as an economic headwind because companies that are highly exposed to these sources of uncertainty may postpone investment and hiring decisions. This may weigh on household confidence, triggering a reduction in discretionary spending. Financial markets may also become more volatile because investors shorten their investment horizon. There is a clear urgency of creating a predictable policy environment.
The latest Employment Situation report prior to the next FOMC meeting (28-29 January) points to the surprising strength of the US labour market, illustrated by job creation at its highest level since March 2024. Publication concluded a week marked by a significant rise in bond yields against a backdrop of expectations of rates "higher for longer", leading to sharp movements on the financial markets.
The year 2024 is coming to an end, but political and economic uncertainties persist and are expected to continue into 2025, albeit in new forms. Donald Trump’s economic agenda is known. On the other hand, the measures that will actually be implemented, their timing and their economic impact are among the great known unknowns of 2025. In any case, uncertainty itself is expected to be a major drag on growth next year. A convergence of growth rates between the US and the Eurozone is expected in the course of 2025, via a slowdown in US growth. The latter would suffer from the inflationary effects of Trumponomics and the resulting more restrictive monetary policy, with the Fed's expected status quo on rates throughout 2025
Since 2019, private sector debt in emerging countries as a whole has risen as a percentage of GDP, while at the same time private sector debt in advanced countries has fallen. However, a country-by-country analysis shows that China alone is responsible for this increase and that, even excluding China, debt ratios show positive aggregation effects. In fact, on the basis of median ratios and credit gaps, excluding China, the private sector has develeraged in a large number of countries, until the third quarter of 2024. Current and future economic and financial conditions point more to a continuation of the decline than to a rebound.
Would you expect a politician who promises to raise taxes on both households and corporates as a key plank of their growth strategy to get elected? Or the Parliament of an EU member state to vote against an EU initiative to cut such taxes? Probably not. And yet both just happened, with Donald Trump and fellow Republicans taking control of both the White House and Congress, and the French Parliament voting against the EU-Mercosur trade deal.
For the time being, Donald Trump has not specified his intentions on banking regulation. However, there is a risk that he will push for an incomplete translation of the finalisation of Basel 3 into US law. This would undermine efforts to harmonise international prudential frameworks and introduce significant distortions of competition between US and European banks.
Much has happened since Q4 Outlooks published in September cheeringly predicted, as a matter of consensus, that the global economy was heading for a soft landing after the sharpest inflation surge and most abrupt monetary tightening in decades. On the economic front, more data have been released, helpfully adding pixels to the growth, labour market and inflation pictures. On the politics and policy fronts, China unveiled a large stimulus package, the US voted in a new President and Congress, the UK released a radical 2025 budget, and France and Germany limped into new governing arrangements.
The election of Donald Trump as President of the United States has raised fears that protectionist measures will be stepped up. Customs duties would be applied to all products from all of the United States' trading partners. In addition to China, the main country targeted, concerns about the macroeconomic and financial consequences of such a policy have risen sharply in Mexico.
In Spain, Italy and Portugal, the five largest banking groups recorded, on average and on a consolidated basis, an annualised return on average equity (ROAE) of 15.0%, 15.6% and 18.1%, respectively, in the first three quarters of 2024. These are levels not seen since 2007.
The second-last FOMC Meeting of 2024 has resulted in a 25bps cut in the Fed Funds Target Range, to +4.5% - +4.75%. The steps ahead promise to prove trickier for the Fed, as the landing is still pending, and in view of Trump’s win. Indeed, the President-elect’s hostility towards Powell is common knowledge, while many of his policy plans are associated with an increased inflation-risk.
The sun was shining last week in Washington, DC during the Annual Meetings of the International Monetary Fund (IMF), but the imminent US elections cast a shadow over the meetings of the Finance Ministers, Central Bank Governors, and private sector economists and finance professionals from all around the world who gathered in town. The better-than-expected state of the global economy was obscured, and all other conversations relegated to second or third billing, including the IMF’s usual warnings about various dangers (excessive debt, insufficient growth, protectionism), the outlook for Europe (improving), for China (as well), for other EM (generally good) and digital finance (further gaining status).
On 30 September, the Federal Housing Finance Agency (FHFA) announced its intention to raise counterparty exposure limits on the deposit accounts of Federal Home Loan Banks (FHLB) to the same level as those limits set for their federal funds loans, an approach already discussed in its December 2023 report. This harmonisation could lead FHLBs to favour deposits with banks, as these are better remunerated. Supply on the federal funds market, on which FHLBs occupy a prominent position as lenders, would be reduced, driving up the effective rate of federal funds.
The Italian real GDP over the past three years is higher than previously estimated, thanks to the 2024 general revision of the national accounts. This revision, which is undertaken every five years and was published by the Italian National Institute of Statistics (Istat) on 23 September, includes the basis change with reference year 2021. As a result, real GDP is finally, albeit only slightly, above the level posted before the 2008 financial crisis (0.6 pp higher in Q2 2024 than in Q4 2007).
The September FOMC meeting kick-started the Fed’s easing cycle with a significant 50bps cut in the Federal Funds Target Rate, leaving it at +4.75% - +5.0%. Unusually, this large step was taken even as the US economy remains strong, and explicitly with a view to keeping it so. Effectively, macroeconomic conditions having induced a shift in the Fed’s priorities towards the ‘maximum employment’ component of its dual mandate, while still not declaring mission accomplished on the inflation side
In June 2022, the US Federal Reserve kick-started a programme to reduce the size of its balance sheet (QT2). However, banking regulations could hinder its ambitions. The first quantitative tightening (QT1) programme, which was launched by the Fed in October 2017, had already been curtailed early due to the liquidity requirements imposed on banks. Balance sheet constraints could in turn bring QT2 to an early end. The tightened leverage standard is already reducing the ability of banks to act as intermediaries in the secondary markets for US Treasury securities while federal government financing needs continue to grow.
The public and private moratoria granted since the onset of the Covid-19 pandemic to the Portuguese non-financial private sector[1] have, to a very large extent, now expired. The outstanding amount of loans under moratoria stood at EUR3.1 bn in October 2021, from EUR3.6 bn in March 2020 and a peak of EUR46.3 bn in September 2020. Moratoria now cover only 1.5% of outstanding loans to households and non-financial corporations, from 1.9% in March 2020 and 23.5% in September 2020. The expiry of moratoria since September 2021 has not, so far, resulted in a significant increase in non-performing loans[2]. Their outstanding amount (EUR4.0 billion) and ratio (2.0% of loans) have returned to their July 2008 levels
