MacroScope

ECB – stick or twist?

 

The European Central Bank meets today with emerging market disorder high on its agenda.

It’s probably  too early to force a policy move – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January, way below the ECB’s target of close to but below two percent.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.

But what to do? A small interest rate cut from 0.25 percent to somewhere just above zero is hardly going to be a game changer and the ECB has already said it won’t prime banks with long-term cheap money again unless they commit to lend into the real economy.

With stress tests looming and those same banks being told to deleverage and build up capital that is anything but straightforward though given the downward pressure the bank tests are likely to exert on lending there is certainly a case for an LTRO if banks do commit to pass the money on to businesses.

Olympics provided gold for Team GB, but not the economy

Britain’s Olympic and Paralympic teams may have brought home more medals than organisers had dreamed possible but the Games themselves have probably failed to lift the economy as much as the government had hoped.

The country’s gross domestic product will grow 0.6 percent in the current quarter, according to the latest Reuters poll, revised down from a 0.7 percent prediction in an August poll.

That is enough to drag Britain out of its second recession in four years but most of the bounceback is from an extra working day and better weather in the quarter.

Asking a banker about the Olympics

Henrique Meirelles, Brazil’s highly rated central bank president, gave unusual insight into current thinking at the International Olympic Committee in a speech in Oxford the other night.

Diverging from his main theme on Brazil’s remarkable journey from economic basket case to emerging market superpower, Meirelles said that he had gone to Copenhagen last month as part of Rio de Janeiro’s successful bid for the 2016 Olympics. The reason: The IOC asked him to come.

Meirelles said that the IOC knew that Brazil currently had all the conditions needed to host the Games, but wanted to know about how predictable it was that this would carry through over the next seven years. “They wanted to know what is really happening,” he said.