With consumer prices slumping in Spain and German inflation below the dangerous 1% mark, there have been rumblings in recent days that looser monetary policy is required, urgently.
A warning comes from Wouter Sturkenboom, EMEA investment strategist at Russell Investments, who believes that if credit growth does not pick up, investment and consumption will remain depressed, thus preventing any eurozone recovery from becoming self-sustaining.
“This is a grave risk given the fact that unemployment is very high, budget deficits are elevated, growth rates are diverging, and deleveraging is non-existent,” he says.
No choice
“We would like to see more reflationary policies from the ECB to decisively push nominal growth above nominal interest rates, so the whole eurozone can exit its debt trap. In the end, it will have no choice but to act.”
Harsh words, though Sturkenboom does not go so far as to suggest that QE is forthcoming (he believes we are more likely to see a Funding for Lending type scheme).
Andrew Bosomworth, managing director and head of portfolio management at Pimco’s German office, expects the ECB to leave all rates and unconventional policies on hold at today’s meeting.
Further out he expects the bank to begin easing policy within the next three to six months, though he adds that the eurozone will have to encounter another negative demand shock before QE is implemented.
Distributional consequences
He adds: “A eurozone QE policy in proportion to the ECB's capital key could have uncertain distributional consequences. QE would lower yields in all countries but probably have a disproportionally large impact in countries like Italy and Spain, hopefully boosting their investment and consumption.
“But lower interest rates in Germany might risk a real estate bubble developing there, where signs of speculation are already emerging. So while QE may achieve a higher overall eurozone inflation outcome, it is not clear whether the composition of that higher inflation would be any healthier than the composition of today's low inflation.”
How any unexpected move from the ECB would impact markets is anyone’s guess. The DJ Euro Stoxx 50 was up 2% year-to-date to 1 April, though 2014 has so far been a volatile one.
