ECB quandary

November 19, 2013

Another round of European Central Bank speakers will command attention today with disappearing inflation fuelling talk of further extraordinary policy moves.

Chief economist Peter Praet, who last week raised the prospect of the ECB starting outright asset purchases (QE by another name) if things got too bad, is speaking at Euro Finance Week in Frankfurt along with Vitor Constancio and the Bundesbank’s Andreas Dombret, while Joerg Asmussen makes an appearance in Berlin.

We know a quarter of the ECB Governing Council didn’t want to cut interest rates (a move which Praet proposed) two weeks ago and more glaring differences could be about to emerge. Printing money would be hugely difficult for German policymakers and their allies to countenance.

If anything more is done, it is most likely to be a new round of long-term liquidity pumped into the banking system – a repeat of last year’s LTROs. A negative deposit rate to push banks to lend more is not impossible but the ECB has been reluctant so far and there are problems in terms of distorting the money market. Today’s line-up of speakers reflects both sides of the debate.

On Monday, ECB policymaker Ewald Nowotny said there was no need for an immediate policy response to below-target inflation. The consensus is that any action will not come until next year.

Germany’s CDU/CSU and SPD party leaders meet to discuss coalition policy compromises with the end-game nearing. Over the weekend, Merkel signalled her readiness to accept the Social Democrats’ demand for a legal minimum wage in order to secure their agreement to form a government.

Turkey holds an interest rate meeting today. The Turkish central bank has insisted it will not raise official interest rates to defend the lira but it was in the market again in recent days selling dollars.

There is political pressure not to raise official rates with a round of elections looming next year but the lira firmed on Monday on speculation that the central bank  could flag tighter policy to underpin a weak currency which is pushing up inflation pressures.

Germany’s ZEW sentiment index is the top figure of the day and expected to climb further in November. After lacklustre euro zone GDP data last week, the OECD’s semi-annual global economic outlook will make interesting reading.

Last night, Greece’s finance minister said talks with EU/IMF/ECB lenders continued and that the aim was to reach agreement by a meeting of euro zone finance ministers on Dec. 9. At issue is how to close a 2 billion euros gap in the 2014 budget.

Norwegian’s third quarter GDP is forecast to show stronger growth of 0.4 percent, up from 0.2 in Q2. Following that, we have a timely interview with Norway’s new finance minister, Siv Jensen.

Nigerian President Goodluck Jonathan presents a 2014 Budget to parliament. Foreign and local investors will be watching closely for indications of spending plans and the financing options that can drive local debt markets.
Bank of Nigeria also has an interest rate meeting. Rates have been at 12 percent for more than two years and even though inflation is moderating, a cut does not appear likely.

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