Reuters blog archive
from Anatole Kaletsky:
At last, the European Central Bank seems ready to inject some adrenalin into the moribund euro zone economy. After last week’s news conference, when European Central Bank President Mario Draghi strongly hinted that action would take place after the June 5 council meeting, there have been a host of interviews and leaks specifically describing the new ideas the bank has in mind.
The biggest measure, now almost a foregone conclusion, will be a cut in the interest rate the ECB pays on bank deposits from zero to negative 0.1 or 0.2 percent. Bank officials have also hinted at several additional stimulus measures: extension of loans to commercial banks at low fixed rates for three years or even five years; ECB purchases of bank loans to small and medium enterprises, packaged into asset-backed securities; and concessional lending to European banks on condition they pass on these funds to small and medium businesses.
The leaks generated a great deal of enthusiasm this week. The euro weakened from almost $1.40 to $1.37; bond yields in Italy and Spain fell to record lows; and European stock markets jumped 1 percent to 2 percent. Wednesday, the market reaction crossed the Atlantic, with interest rates on U.S. Treasury bonds falling to their lowest levels in six months.
Sadly, however, investors may be overexcited. Even assuming that all the reports about ECB plans turn out to be true, the bank failed to follow through on similar rumors several times recently. It is also far from clear that these policies would address the big economic problems facing the euro zone: feeble economic growth and widespread unemployment; a continuing credit crunch for small and medium enterprises in Southern Europe; vast imbalances in competitiveness between Germany and the rest of the euro zone, and deflationary pressures that create debt traps and balance-sheet recessions in the peripheral economies.
Euro zone inflation has dipped again and some forecasters are hedging their bets on the policy response by saying the European Central Bank could either cut rates this week or sometime in the next two months.
That lack of conviction, although not a recent phenomenon, is driven by memory of the ECB's surprise cut in November after a similar drop in inflation and a nagging belief that things have not worsened enough in the interim to warrant another.
from Nick Vinocur:
Here’s a tip for anyone curious to know where the next generation of monetary policy tools is being dreamt up: Look north.
Sweden’s central bank – which brought us the world’s first official negative rate in July – took another swipe at economic groupthink this week in a paper that argued against a core principle of interest rate theory.