BoE and ECB should ease! What’s to hold them back?
Mike Lenhoff – Chief Strategist
Brewin Dolphin
Investment Research
3 October 2011
Eurozone finance ministers meet today in Luxembourg to discuss Greece and how they might respond to the international pressure to accelerate their efforts in putting in place a credible and larger mechanism (than the enhanced EFSF) for dealing with bailouts, bank recapitalisations and support operations in sovereign debt markets. It is doubtful though that the finance ministers will be galvanised into action; that is not quite the behaviour one has come to expect from them.
Although not in the giant league by assets, it may still be of interest to see what comes of today’s meeting with Dexia and the French and Belgium finance ministers as a guide or lead on what might be expected elsewhere. The three are meeting to see how the balance sheet of the Franco-Belgium financial services group, and big holder of Greek debt, might be strengthened.
It will be astonishing if, against a backdrop where the risk to financial stability in the eurozone has been steadily worsening, as reflected in the rise of the CDS premiums for the banking sector, the ECB chooses not to reverse its recent hikes in interest rates. The ECB may fret about the damage this might do to its credibility. However, the risk of the eurozone’s banking crisis is not just recession but deflation. The prospect of the unexpected rise reported last week in September’s eurozone inflation rate to three per cent becoming minus three per cent in the not too distant future is not far fetched. We think the ECB will deliver a quarter point cut on Thursday.
Equally, there is a good chance that Thursday’s meeting of the BoE’s Monetary Policy Committee will go Adam Posen’s way and endorse a further round of QE of at least 50 billion pounds. The last set of MPC Minutes acknowledged the growing case for more policy easing. With the UK’s main trading partner in trouble and the rapid loss of momentum in the US, you wonder what there is to hold the MPC back.
The ECB and MPC should take their lead from the Central Bank of Brazil, which chose to get ahead of the curve. The trend of inflation has yet to turn but interest rates were still cut on the view that, by the time inflation turns, the economy could be in recession. Responding then would be too late.
Markets are short of good news and are likely to remain anxious ahead of Friday’s US non-farm payrolls. The latter will include the return of Verizon’s workforce, which depressed the August payrolls. So for sentiment, which is on a downer, to be lifted even by a smidgen, Friday’s numbers will need to be really big. The difficulty is that equity markets are not yet oversold and are vulnerable to the slightest provocation for any further selling.
Better that the BoE and the ECB ease this week. At least some good might come of it and moreover it might even bring some relief in what is a joyless time for equity markets.
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