Concerns remain after new proposals of euro leaders
12-12-11
- The Chart of the Week shows total assets as a percentage of nominal GDP of the Bank of Japan, Federal Reserve and the ECB. The chart shows that the ECB has been aggressive already over the last few years. The ECB's balance sheet has exploded to about 25% of nominal GDP and this percentage is expected to increase further going forward, but whereas other Western central banks (such as the Fed and the BoE) have done QE, the ECB's balance sheet has mainly surged by offering banks unlimited amounts of cash via loans. The chart also shows that the relative size of the ECB's balance sheet has been a bit more substantial than that of the Fed.
United States
- The Fed will be ready to support the economy when things take a turn for the worse, but there is no urgency to act at present. Most FOMC members will probably want to wait and see what happens in the euro zone and in the US in the coming months before deciding to act. A potential obstacle to announce QE3 in the short-term is that consumer price inflation is still elevated at 3.5%, but we expect the annual CPI inflation rate to decline sharply in the coming months towards 2%.
- If economic growth slows or the economy falls into recession most FOMC members will probably be more than willing to start the 'printing presses' again, but several Fed policy makers already noticed that they first prefer an adjustment of the communication strategy. The latter will unlikely be finalised already at Tuesday's FOMC meeting.
Euro zone
- EU leaders agreed on a number of measures, including some small steps towards fiscal integration (e.g. on stricter fiscal and financial discipline that will also be introduced in national legal systems) and the promise to provide additional money to the IMF of up to EUR 200bn via bilateral loans.
- In addition, the EFSF will remain active until mid-2013, while the permanent ESM should come into force in July 2012. The ESM's mutual agreement rule (i.e. that unanimity is needed) will be replaced by a qualified majority of 85% in case a country needs emergency loans, but the Finnish parliament still has to make a decision on this subject (2/3rd of Finnish lawmakers have to back the adjustment).
- The ECB has cut rates again by 25bps in the second meeting for Draghi as ECB president. As ECB officials continue to reiterate that they focus on their price mandate, but argue that the transmission mechanism to achieve that goal is not working as it should and funding pressures are picking-up, also a series of other measures were announced last Thursday.
- Furthermore, Draghi made clear that the ECB should act in line with the "spirit of the Treaty". Accordingly, no QE should be expected in the short-term at least in our view. Yet, we think QE could move into the crosshairs somewhere in the future in case certain risks such as a catastrophic event (e.g. a euro zone break-up) or deflation materialise. Even in such hypothetical conditions it remains to be seen whether the ECB will purchase government bonds or that the ECB will (first) purchase other assets such as covered bonds.
United Kingdom
- The Band of England's MPC refrained from further monetary policy loosening last week. Consequently, Bank Rate and the size of the Asset Purchase Facility remained unchanged at 0.50% and GBP 275bn respectively. Nonetheless, the MPC may decide on another round of asset purchases in the coming .
- Business and consumer surveys signal that economic growth came to a halt recently. Albeit the services PMI rose to 52.1 in November from 51.3 in October, news from the manufacturing sector was more downbeat as the PMI came in at 47.6 in November and also 'real' data showed that the fourth quarter started on a sombre note.