Publication date: 5 January 2015 | Covering: December 2014
Monthly Briefing
- FRESH — Fed December 16–17: Holds 0–0.25%; removes “considerable time”; adds “patient”; 2015 liftoff signalled (20 days ago)
- Russia ruble crisis: Ruble collapses 50%+ against dollar in 2014; CBR emergency hike to 17%; oil sanctions compound pressure
- Oil: Brent falls to US$55–60/barrel; OPEC November 27 decision to hold production; shale under intense pressure
- US Q3 GDP revised to 5.0% annualised: strongest quarter since 2003; employment solid; Fed confident in recovery
- Eurozone: ECB stops short of sovereign QE; Draghi signals January announcement; deflation risk building
- Jamaica IMF EFF; BOJ easing; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Fed Pivots to ‘Patient’; 2015 Liftoff on Horizon
The Federal Open Market Committee held the federal funds rate at 0 to 0.25 per cent at its December 16 to 17 meeting — the final policy decision of 2014 — but made the key language change the market had been anticipating since the end of QE3 in October. The statement replaced “considerable time”, which had described how long the Fed expected to wait before raising rates, with a new formulation: the Committee judged it “can be patient in beginning to normalize the stance of monetary policy”. The statement explicitly noted that this new language was “consistent with” the previous “considerable time” language, but Yellen’s post-meeting press conference clarified that “patient” signalled the Committee was unlikely to raise rates for at least two more meetings — making March 2015 effectively off the table. The updated summary of economic projections showed the median FOMC participant expected four quarter-point increases in 2015, suggesting liftoff in June or September and a federal funds rate of 1.00 to 1.25 per cent by year-end. The revised projections also showed an upgrade to the growth outlook and a downward revision to the unemployment rate path, reflecting confidence that the US recovery was durable. Seventeen meetings of zero interest rate policy were approaching their end.
Russia Ruble Crisis; Oil’s Collapse Deepens
The Russian ruble suffered one of the most severe currency crises of the post-Soviet era in December 2014. Oil’s decline, which had accelerated sharply after OPEC’s November 27 decision to maintain production targets, combined with Western sanctions imposed following the annexation of Crimea and the conflict in eastern Ukraine to put extreme pressure on the ruble. The currency fell more than 50 per cent against the US dollar over the course of 2014, with a particularly sharp leg down in mid-December when the ruble fell more than 10 per cent in a single day. The Central Bank of Russia responded on 16 December with an emergency rate hike of 6.5 percentage points to 17 per cent — the largest single hike in Russia since the 1998 financial crisis. Capital controls were discussed but not implemented. President Putin addressed the nation on 18 December, attributing the crisis primarily to external factors and projecting that conditions would normalise within two years. Russia’s experience was a sobering example for any emerging market economy of how quickly commodity-dependent export revenues and external financing conditions could deteriorate under the combined pressure of lower commodity prices and geopolitical isolation.
Oil: OPEC Holds; Shale Under Pressure
OPEC’s decision on 27 November to maintain its production ceiling of 30 million barrels per day sent oil prices sharply lower in a move that was widely interpreted as Saudi Arabia prioritising market share over price stability. The decision abandoned OPEC’s traditional role as a price-setting swing producer and represented a significant strategic shift: rather than cutting output to support prices, the cartel was allowing prices to fall to a level that would test the economics of higher-cost producers, including US shale operators. Brent crude fell from above US$80 per barrel before the OPEC meeting to US$55 to US$60 by late December, and West Texas Intermediate fell to around US$55. For Jamaica, lower oil prices were unambiguously positive: the island imports essentially all of its petroleum, and lower energy costs reduced the import bill, eased inflationary pressure, and improved the current account balance. The BOJ’s ability to maintain its accommodative monetary policy stance was enhanced by the disinflationary tailwind from lower energy prices.
US Q3 GDP 5.0%; Economy Outperforms
The final revision to US third-quarter GDP confirmed annualised growth of 5.0 per cent, the strongest quarterly growth rate since the third quarter of 2003. The strong reading reflected robust consumer spending, solid business investment, and improving net exports. The US labour market continued to perform well: the November payrolls report showed 321,000 jobs added, the strongest single-month reading since January 2012, and the unemployment rate fell to 5.8 per cent. The US economy’s outperformance relative to other major economies in 2014 — while Europe stagnated and Japan flirted with recession — provided the Federal Reserve with the confidence to end QE3 in October and begin preparing markets for rate normalisation. For Jamaica’s tourism and remittance-dependent economy, a strong US economy and labour market was a significant positive driver: higher US employment meant more Jamaican-American families with disposable income for remittances, visits, and property purchases.
Jamaica Mortgage Market in December
Jamaica’s mortgage market closed 2014 in a materially better position than it had started the year. The IMF EFF programme, entered in May 2013, had underpinned fiscal consolidation and provided a credibility anchor for BOJ monetary policy. Domestic interest rates had fallen substantially from their 2012 to 2013 highs, and NHT lending activity had remained steady. The NHT’s J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent continued to provide the accessible affordable housing finance pathway for qualified contributors, and the two-applicant ceiling of J$13 million broadened the pool of eligible property purchases. Lower global oil prices provided an unexpected additional tailwind heading into 2015, easing the current account deficit and reducing imported inflation. Commercial lenders entered the new year with a cautiously optimistic outlook for mortgage demand as consumer confidence gradually improved.
Looking Ahead
2015 opens with the Federal Reserve positioned to raise interest rates for the first time since June 2006 — a prospect that has been a decade in the making for global financial markets. The ECB is widely expected to announce sovereign bond purchases at its January meeting, and the Greek election on 25 January could produce significant political turbulence if SYRIZA wins on an anti-austerity platform. For Jamaica, the IMF EFF programme reviews, BOJ monetary policy, and the trajectory of US economic conditions and remittance flows will be the principal drivers of the mortgage and housing market in 2015. The year begins with cautious optimism: lower oil prices, a stable exchange rate, and improving consumer confidence provide a better launching point than the difficult conditions of 2012 and 2013.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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