IMF head Christine Lagarde has warned that financial markets maybe a little too upbeat given the persistently high levels of unemployment and debt in European economies.
She also warned that continuing low inflation could undermine growth prospects in the region.
But she did say the European economy was recovering and interest rates should stay low until demand picks up.
Last month, the European Central Bank cut its main interest rate to 0.15%.
It also cut its deposit rate – the rate it pays banks to keep money on deposit – to -0.1%, becoming the first major central bank to introduce negative rates. >> Read More
One (voting) policymaker has suggested the Federal Reserve will pull the trigger on the first rise in US interest rates since the financial crisis in the early part of 2015.
Richard Fisher, the president of the Dallas Fed and a voting member on the Fed’s top panel, said on Wednesday that the world’s largest economy is recovering more quickly than the central bank had forecast.
Despite a surprise contraction in the first-quarter, the US labour market has continued to improve with the unemployment rate falling to 6.1 per cent in June.
That has intensified speculation among investors over when Fed officials will raise their key overnight borrowing rate. In a speech in Los Angeles, Mr Fisher said:
That early next year, or potentially sooner depending on the pace of economic improvement, the FOMC may well begin to raise interest rates in gradual increments, finally beginning the process of policy normalization.
Mr Fisher also took issue with the argument that a combination of tighter regulation and new capital requirements on banks will be enough to temper the potentially risk-taking by investors that low interest rates encourage. >> Read More
Mario Draghi’s plan to end the euro area’s lending drought risks missing the target.
While the European Central Bank president says a program to hand as much as 1 trillion euros ($1.4 trillion) to banks has built-in incentives to spur lending to the real economy, analysts from Barclays Plc to Commerzbank AG have doubts on how well it will work. In fact, the measure allows banks to borrow cheaply from the ECB even without increasing credit supply.
Draghi has identified weak lending as an obstacle to the euro area’s recovery and is committed to reversing a slump that has eroded more than 600 billion euros in loans to companies and households since 2009. The risk is that if the latest plan fails, the currency bloc slips closer to deflation and to the need for more radical action such as quantitative easing.
“It’s not the silver bullet,” said Philippe Gudin, chief European economist at Barclays in Paris. “Every incentive for banks to lend is a good thing, but I wouldn’t say I’m reassured that credit will pick up.” >> Read More
Eurozone inflation is still worryingly low.
Eurostat, the commission’s statistics bureau, said on Monday that inflation had remained at 0.5 per cent in June
The figure is in line with economists’ expectations but means inflation remains little more than a quarter of the European Central Bank’s target of below but close to 2 per cent.
Policy makers from the currency bloc will gather in Frankfurt later this week to discuss recent economic developments. >> Read More
The lady has spoken.
Christine Lagarde of the International Monetary Fund has told the European Central Bank that they need to consider Quantitative Easing if inflation continues to remain low, which it will. She stated: “If inflation was to remain stubbornly low, then we would certainly hope that the ECB would take quantitative easing measures by way of purchasing of sovereign bonds”.
Apparently Lagarde’s version of ‘stubborn’ is something that persists despite taking measures to boost otherwise. In other words, is this the last resort of the ECB and the IMF? Is there nothing else to do apart from print the money and inject it into the financial markets to over-inflate them as the US has done with the Federal Reserve’s money being thrown from the helicopters?
So, prepare yourself for the hefty buzzing noises emanating from the cellars of the ECB. Mario Draghi will be starting them there printing presses rolling just as soon as he can. The French can start liking Europe again and stop hating their President, Mr. Flabby François Hollande. The Brits can carry on with their housing boom and not fear the collapse of their bubble (just quite yet). The rich can get richer and governments can hide the fact that they aren’t creating jobs for anyone but themselves and the boys that belong to their clubs. After all it’s all about the stock market increasing, isn’t it? >> Read More
Investors are not betting Janet Yellen will follow a fellow central banker’s lead and declare interest rate rises “could happen sooner than markets currently expect”.
Suck hawkish cries can be left to Mark Carney. The Federal Reserve chairman, by contrast, will likely use her post-policy meeting press conference this week to reiterate US rate rises are still a way off. But are they?
What if we were to look not at what Ms Yellen says, but at what Ms Yellen has done? We might then conclude that the Fed’s first rate hikes could indeed happen sooner than expected.
This is the intriguing premise of a tool being used internally at BlackRock, the world’s largest fund manager, which it has nicknamed “the Yellen index”. It is a measure that suggests, on the economic indicators favoured by Ms Yellen, monetary tightening is already overdue and the Fed falls further behind the curve with every passing day. >> Read More
Central banks in developed countries are struggling to navigate a world in which traditional monetary policies no longer have the effect they once did.
Since the 2008 global economic crisis, they have continued to flood financial markets with massive amounts of funds. The wealthy benefited immensely from the resultant gains in asset prices, but this did little to help people without assets or countries saddled with heavy debt.
Shadow of deflation
In the small central Italian city of Fermo in mid-May, Fabiana Magri stood in a supermarket, contemplating a half-off sales sign with a serious expression on her face.
It has been five years since the 36-year-old lost her job, and her spending habits have changed fundamentally from the time both she and her husband worked. She likes to read, but nowadays only chooses free e-books that she can find online. She rarely buys new clothes.
With many people facing similar situations, Italian supermarkets are desperate to loosen their customers’ purse strings. Deep discounts are a sign of how tough business has become for supermarkets. >> Read More
We anticipate that it will take investors some time to digest the new initiatives the ECB announced last week. The ECB will be providing more details as well going forward. Here we will review the actions and discuss the implications of the different measures.
There were five new measures announced:
1. Rate cuts: The entire rate corridor was cut. The marginal lending rate, which is the upper end of the corridor was cut to 40 bp from 75 bp. The refinance rate was cut 10 bp to 15 bp. The deposit rate, which was at zero, was cut to -10 bp. A negative rate has not been adopted by any other major central bank, even the Bank of Japan, despite years of trying to combat deflation.
2. Full allotment extended: The full allotment of refi operations was extended until the end of 2016. In “normal” circumstances, banks are forced to bid for funds. The full allotment provides whatever funds banks want provided they have the collateral. >> Read More
1. ECB: In this eventful week, the ECB meeting is by far the most significant. Draghi came the closest the ECB does to pre-committing to moving this week, with the new staff forecasts in hand. There is some uncertainty of precisely what the ECB will do. However, the range of options appear be narrowed to interest rate adjustment, forward guidance, and perhaps a targeted funding-for-lending scheme. There does not seem to be a consensus for outright asset purchases, but Draghi is likely to emphasize in his press conference that the ECB is prepared to do more if necessary.
A move to negative deposit rates is the most important of the measures that may be announced. It is unprecedented among key central banks. Even combating deflation for years, the Bank of Japan never charged banks for depositing money with it. Most observers do not seem to think it will have much impact. We remain concerned about the knock-on disruptive indicators to large economic agents, including the government itself, money market funds and businesses. In a perverse way, a negative deposit rate may also aggravate the contractionary impulse in the financial sector by leading. The flash May CPI will be released on Tuesday. After softer Italian and Spanish figures before the weekend, the risk would seem to be on the downside to the April 0.7% reading.
We suspect the 4 cent decline in the euro over the past month to have largely discounted a 10-15 bp cut in key lending rates. Such a rate cut is unlikely to cover in full the reduced inflation estimates the ECB staff is likely to project. Technically, the euro may be poised to bounce. The event has long been anticipated. “Sell the rumor, buy the fact” behavior is not uncommon. It was also what appeared to be the case in the US. A case in point is the dollar’s sell-off in anticipation of the third round of QE. It recovered after it was announced. >> Read More