ECB Widely Expected to Keep Rates on Hold
23/06/09 20:40
Chris
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The [ECB WEBER] has warned banks that they have to pass on lower rates of interest to their customers. Note, the ECB refi rate currently stands at just 1%, with the most recent cut being seen on May 7th (-25bp). The ECB are now widely expected to keep rates on hold for the rest of 2009.This means the likelihood of QE in the forseable future is diminishing as EUR rallies.
Yesterday's nervousness serves as a timely reminder that talk of green shoots or even exit strategies for central banks are highly premature. "Greern Shoot's" is well overrated, in my opinion and serves the media cheerleaders feel good slant to maintain viewership and gives them something to talk about. Commodities also slumped and the FOMC now faces the unwelcome prospect of trying to reassure markets that there is still cause for optimism, while only a few weeks ago it was under scrutiny for failing to contain debasement fears in the face of a global economic recovery. The market took notice of the World Bank's downward revisions to global growth yesterday, as the new outlook for a contraction of 2.9% was well below the 1.7% envisaged in March. The World Bank warned that it saw a deeper global economic recession this year and called for more 'bold' policies and coordination. Stay tuned! Most importantly, it noted that the recovery would be 'much more subdued' than normal, and we believe the FOMC will express similar views in its post-meeting statement this week.
Auckland, NZ
Aug 14-16
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Chris Lori's Products and Services visit:
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Chris will be appearing at the Las Vegas Money Show
Aug 2-4
The [ECB WEBER] has warned banks that they have to pass on lower rates of interest to their customers. Note, the ECB refi rate currently stands at just 1%, with the most recent cut being seen on May 7th (-25bp). The ECB are now widely expected to keep rates on hold for the rest of 2009.This means the likelihood of QE in the forseable future is diminishing as EUR rallies.
Yesterday's nervousness serves as a timely reminder that talk of green shoots or even exit strategies for central banks are highly premature. "Greern Shoot's" is well overrated, in my opinion and serves the media cheerleaders feel good slant to maintain viewership and gives them something to talk about. Commodities also slumped and the FOMC now faces the unwelcome prospect of trying to reassure markets that there is still cause for optimism, while only a few weeks ago it was under scrutiny for failing to contain debasement fears in the face of a global economic recovery. The market took notice of the World Bank's downward revisions to global growth yesterday, as the new outlook for a contraction of 2.9% was well below the 1.7% envisaged in March. The World Bank warned that it saw a deeper global economic recession this year and called for more 'bold' policies and coordination. Stay tuned! Most importantly, it noted that the recovery would be 'much more subdued' than normal, and we believe the FOMC will express similar views in its post-meeting statement this week.
The sudden change in tone by these institutions has underscored the need for policymakers to temper investor expectations for a speedy end to expansionary and extraordinary monetary policy. Inflation expectations have once again started to fall, as evidenced in yields the past couple sessions, and even though future price spikes are possible, the fact that real borrowing costs at present are rising globally cannot be ignored and in the short term, central banks look more likely to widen the scope of their extraordinary measures. A Wall St Journal article released yesterday discussed Fed strategy and appeared to be based on discussion with senior Fed officials. The main conclusion of the article is that the Fed will likely reaffirm their commitment to low rates, will signal emergency lending is already tapering off but that the Fed is unlikely to stop its asset purchases cold turkey. This is consistent with the view of our own US economists.
Tomorrow, a hint of willingness to stage more QE will causes USD weakness, although I sense the market has priced in a neutral stance. Markets will probably trade in a choppy manner ahead of the FOMC meeting but the inauspicious start to the week for risk portents further corrections, especially policymakers play their part to dampen expectations. The second-quarter earnings season is also approaching fast and any profit disappointments by a global growth-sensitive heavyweight could be the catalyst for further risk liquidation.
Source: UBS, Chris Lori, Bloomberg