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Each week, the Economic Research Department of BNP Paribas reports on economic news.
Russia and Saudi Arabia strike a deal
Financial markets calm down
The focus shifts back to the ECB and Fed
The downward revision by the OECD of its economic forecasts is a sobering reminder of how challenging the global environment has become.
It also implies that the decline in market nervousness this week, although very much welcomed, doesn’t fundamentally change the picture. Compared to last week not a lot has changed anyhow. Admittedly, the governor of the People’s Bank of China gave an interview with some comforting news, so the re-opening of markets after the Lunar New Year went smoothly, which supported sentiment across the globe. Then there was the agreement between Russia and Saudi Arabia to limit oil production at the January level. The oil market liked the news but some cautiousness, not to say scepticism is warranted.
Moving back to the global environment, there is growing unease about the combination of the prospect of slower growth with policy rates in key countries still very close to zero. Although the willingness of central banks to act is not put in doubt, there are questions about the effectiveness of their actions. A decision by the Federal Reserve to keep the federal funds rate unchanged would be welcomed, but would it give a big boost to growth? If the ECB were to move the deposit rate applied to the excess reserves of commercial banks more deeply into negative territory, would this boost credit demand or would it be better after all to focus on an increase of the asset purchase programme (QE)? The ECB and FOMC meetings of respectively 10 March and 15-16 March will hopefully bring us a clearer picture.
William De Vijlder
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