Ripples from ECB even before it acts

January 20, 2015


The prospect of dramatic European Central Bank action – coupled with the deflationary threat posed by a plunge in the price of oil and the pain it inflicts on oil producing countries – is putting the financial system under growing stress.

After the Swiss National Bank’s shock decision to abandon its Swiss franc cap last week, probably in anticipation of the ECB printing a flood of euros, Denmark was forced yesterday to cut its certificate of deposit and lending rates deeper into negative territory to stop the crown strengthening.

Analysts expect further rate cuts should the crown again test the stronger end of its range. The government says its peg against the euro is not under threat, some in the markets are not so sure.

It’s not unreasonable to expect other dominoes to fall. But where?

Poland is awash with Swiss franc mortgages and its central bank governor said yesterday that Polish banks should cut the mortgage rates they charge borrowers because the surge in the Swiss franc required “extraordinary” measures.

The central bank may discuss this at its regular non-rate setting meeting today and central bank chief Marek Belka is due to meet Finance Minister Mateusz Szczurek and the heads of banks that have granted the most foreign exchange mortgages.

Sweden is not facing an immediate threat of deflation even though annual inflation came in at -0.3 percent in December, its central bank chief said yesterday. The government produces new economic forecasts today.

If the European Central Bank surprises on the upside with a large quantitative easing programme on Thursday some of these stresses will intensify. It would probably prompt another Danish rate cut for a start. If it disappoints markets with a limited programme which puts risks back on national central banks, speculation will immediately start about the fate of the euro zone economy.

Greek elections on Sunday could add to prevailing jitters. The latest poll last night showed anti-bailout Syriza stretching its lead to 6.5 percentage points.

Chinese data showing the world’s second largest economy grew at its slowest pace in 24 years in 2014 and is expected to lose more momentum this year, is unlikely to help although markets are aware of the fact that it keeps pressure on Beijing to head off a sharper downturn.

Despite the potential fillip to consumer and corporate spending from cheaper energy, the world economy is slowing. Early this morning, the International Monetary Fund lowered its forecast for global economic growth and told governments and central banks to pursue accommodative monetary policies and structural reforms to support growth. Global growth is projected at 3.5 percent for 2015 and 3.7 percent for 2016, the IMF said, lowering its forecast by 0.3 percentage points for both years.

We get central bank meetings in Nigeria and Turkey today.

Nigeria’s central bank, which devalued the naira by 8 percent last November, has been struggling to defend the currency in the wake of falling oil prices. Some analysts expect a further devaluation at some point to save foreign reserves from being eaten up though looming elections may cramp the central bank’s room for manoeuvre.

The naira, which has been hammered by the collapse in oil prices, fell 3.6 percent to a record low on Monday before recovering some ground. However, it still booked its weakest close on record. The central bank is widely expected to keep interest rate on hold at 13 percent at, maintaining tight liquidity to support the currency.

Turkey’s central bank has a policy meeting days after President Tayyip Erdogan dusted off his call for interest rates to be cut. Last month, the bank held its one-week repo rate at 8.25 percent despite a fall in inflation expectations, and said it would keep policy tight until there was a clear improvement in the outlook for prices. Most analysts expect a cut this time.

Of 20 economists polled by Reuters, 11 expect the central bank to cut the one-week repo rate. Eight of them predicted a quarter-point cut and three expected a half-point reduction.

Top of the data pops will be Germany’s ZEW sentiment index which is forecast to climb. The Bundesbank said on Monday that low oil meant inflation would rise only slightly in Germany this year.


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