Page 28 - July-August 2018 GSE Report Flip Book

MONETARY POLICY
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Calling the Venezuelan migration crisis a “threat to the whole South American continent,” Brazil’s president, Michel Temer, signed a decree authorizing the deployment of armed forces to the border state of Roraima to defend the Venezuelan border. “The problem of Venezuela is no longer one of internal politics,” said Temer. “It is a threat to the harmony of the whole continent. ...We will seek support in the international community for the adoption of firm diplomatic measures to solve this problem, which is no longer a country’s internal policy, but has advanced across the border of several countries and threatens the harmony of our entire continent.”
Peru has declared a 60-day health emergency in two provinces on its northern border, citing ‘imminent danger’ to health and sanitation. (The Independent, Tom Barnes, 08/30/18; Bloomberg News, Matthew Bristow and John Quigley, 08/30/18)
Make or break time in Europe
Deutsche Bank analysts wrote:
As the summer comes to a close..., we discuss the main macro themes for the euro area. The sustainability of growth is one theme. Economic growth slowed more sharply than expected in the first half of the year and momentum has now broadly stabilized...
The accumulating risks fall into two thematic buckets: trade protectionism and market volatility. With regards to trade war, the costs to Europe become more significant only if auto tariffs are implemented and global trade war undermines confidence. Market volatility encompasses factors like Italy and Turkey. The risks from Turkey seem manageable. Italy on the other hand has the potential to be disruptive because of its high level of public debt ratio
and its systemic size. Much depends on the details of the draft budget in September and the extent to which Italy challenges the European fiscal rules. Recent news flow has become less benign.
The final two themes are inflation and the ECB. Base effects are expected
to lift core inflation to 1.3-1.4% by year end. As long as the risks to growth do not materialize, a sustained rise in core inflation to the critical 1.5% threshold in 2019 will then be more credible. In September we expect the ECB to confirm the phasing out of QE and retain the dovish tone as it leans against the risks. The market is pricing the first ECB policy rate hike in early 2020 – which implies the materialization of downside risks to growth. Our forecast, predicated on modestly above-trend growth continuing, is for the ECB to hike policy rates for the first time in September 2019. (Focus Europe, Deutsche Bank, 08/28/08)
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