Fathom’s Macroeconomic Policy Indicator (FMPI) weights together both fiscal and monetary policy to give an overall measure of the degree of macroeconomic stimulus in any given economy.
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The degree of monetary policy looseness across the euro area is already substantial and will remain so while interest rates are on hold. In terms of when we will see the first interest rate rise, the ECB’s Governing Council explicitly stated in its accompanying statement to the June meeting that rates would be on hold until “at least through the summer of 2019”.
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As a result, we have pushed back our rate hike expectations from two 25 basis point increases in 2019 to one in the third quarter of 2019, with another in the first quarter of 2020.
While the ECB is planning to tighten monetary policy, Italy is considering loosening fiscal policy. The ruling coalition has signalled that it has bold spending plans — a move which has spooked investors, unleashing a fresh wave of volatility in Italy’s bond market. Italy has also reportedly held talks with the ECB to discuss the country’s ongoing debt crisis, and fixed income investors have not taken the news well. The yield on Italy’s ten-year government bond has again broken through the 3% mark, the highest level since the formation of the coalition in June.
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The upshot of all of this will probably be higher growth and inflation in the short term. Italy is already one of the most indebted countries in the currency bloc, and the solution to too much debt is rarely more debt.
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All of these charts, along with additional country coverage are available via Thomson Reuters on the Datastream Chartbook.
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