Politics to trump law in QE decision

January 15, 2015

Deutsche Bundesbank President Weidmann arrives for the annual news conference in Frankfurt

If the law was the ultimate arbiter, the European Central Bank would have the most verdant of green lights for an unlimited bond-buying programme with new money. In reality, politics and German concerns will dictate.

A top advisor to the European Court of Justice, giving a first opinion on a case referred by Germany’s top court on the ECB’s 2012 bond-buying scheme, which has never been used, ruled that it was within EU law.

He went much further than that, saying bond-buying shouldn’t be limited in scope, that the ECB shouldn’t have preferential status on any bonds it held and that buying bonds of euro zone member states with lower credit ratings was not a problem.

To cap it all, there was a coded message for the German constitutional court to back off: courts were not well equipped to rule on this sort of technical monetary policy matter, the ECJ man said.

Reaction from the German government was muted. Bundesbank chief Jens Weidmann, who testified against the OMT programme to the German court and has been leading a rearguard action to limit any QE programme, speaks later today.

The court judgment briefly pushed the euro below its launch level for the first time in nine years and gave a boost to peripheral euro zone government bonds. Spain auctions up to five billion euros of bonds due 2017, 2020 and 2022 today.

The ECB would have no problem justifying action – it is mandated to deliver price stability and inflation close to 2 percent whereas it has just turned negative for the first time since 2009 and is likely to fall further given the precipitous drop in the oil price.

Lest anyone need a reminder, Spanish data due shortly are forecast to show inflation there running at -1.1 percent.

Even mighty Germany could do with a shot in the arm. It is barely growing and now has zero inflation. German full-year GDP numbers at 0900 GMT are expected to show growth of 1.5 percent for 2014, and that was largely due to a bumper first quarter of the year. Despite that, Berlin is intent on running the tightest of fiscal ships.

The ECB could launch QE as soon as its Jan. 22 meeting although Greek elections three days later are a complication. If it comes up with a limited programme, markets will react with dismay.

Our latest information is that the ECB may adopt a hybrid approach with it buying debt and sharing some of the risk across the euro zone while national central banks make separate purchases of their own. The programme may be limited in size to 500 billion euros. But this is a fluid situation and the court judgment may just embolden Draghi and his supporters.

All is not well with the world economy beyond Europe. The World Economic Forum will publish its global risks report issued ahead of the annual gathering of great and good in Davos next week.

On Tuesday, the World Bank lowered its global growth forecast for this year and next due to poor economic prospects in the euro zone, Japan and some major emerging economies. A plunge in the price of copper is also a poor harbinger and oil continues to head south at a rapid rate, despite a short-covering rally yesterday.

The Royal Institution of Chartered Surveyors reported overnight that British house prices rose at their slowest annual pace since May 2013 at the end of last year.

Britain’s David Cameron will meet Barack Obama in the White House with the pair seeking to beef up cooperation between security services following the Charlie Hebdo attacks. It will be interesting to see if Obama repeats his warning about Washington’s strong desire for Britain to remain part of the EU. Russia and Ukraine will doubtless also feature.

U.S. Secretary of State John Kerry will discuss energy issues with Bulgarian premier Boiko Borisov in Sofia in light of tensions with Russia over Ukraine and Moscow’s cancellation of gas pipeline project South Stream that should have crossed Bulgaria.

The wealthy Spanish region of Catalonia has called an election for its parliament on Sept. 27, a vote the main parties want to use as a proxy for a referendum on independence opposed by Madrid.

Egypt’s central bank meets and is expected to leave interest rates unchanged at 10.25 percent after inflation rose last month. India delivered a surprise rate cut in response to oil-depressed inflation.

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