Tuesday, July 1, 2014

Why ECB’s Latest Easing Won’t Work (excerpt)

On August 5, the ECB implemented additional easing moves, including lowering its official rate by 10bps to 0.15% and charging 0.10% on bank reserves. One of the goals was to weaken the euro to boost both the Eurozone’s inflation rate and exports. So far, the euro is down only 1.5% from this year’s high of 1.39 on May 6.

Meanwhile, the region’s recovery remains very weak. Especially troubling is that some of that weakness is showing up in Germany, the Eurozone’s strongest economy. The German Ifo business index fell 1.3% during the two months ending June. The expectations component of this index, which is highly correlated with Germany’s M-PMI, is down four of the last five months by a total of 3.8%. It is also highly correlated with the y/y growth rate in German manufacturing orders, which has been slowing over the past three months.

The Eurozone’s flash CPI for June was released yesterday, showing a 0.5% y/y increase. It’s extremely unlikely that the Draghinomics will be as successful at boosting the Eurozone’s inflation rate as much as Abenomics lifted inflation in Japan given the strength of the euro.

Another drag in the Eurozone is that the region’s banks still aren’t lending. Yesterday, we learned that over the past three months through May, loans are down by €201.2 billion at an annual rate. Perhaps the marginally negative rate on bank reserves at the ECB will encourage banks to lend. However, the ECB and other banking regulators are pressuring them to improve their balance sheets at the same time!

Today's Morning Briefing: Genies vs. Ogres. (1) Lagarde sees inflation genies and deflation ogres. (2) IMF prefers the monetary accelerator. (3) BIS says tap the brakes. (4) Chapter IV. (5) More “noisy” inflation data for Yellen. (6) Bullard sees rate hikes early next year. (7) Yellen more likely to follow Lagarde’s advice. (8) BOE implements “macroprudential policies” for housing. (9) Carney’s misguided guidance. (10) ECB's latest easing probably won’t do much for Eurozone. (11) German indicators weakening. (12) Abe’s third arrow is up in the air. (More for subscribers.)

No comments: