PA ANALYSIS: When it comes to rates, be careful what you wish for

It is not every day that the Bank of International Settlements warns that confidence in central bank omnipotence has begun to falter, but when it does it is worth a read.

PA ANALYSIS: When it comes to rates, be careful what you wish for

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ECB outlook

Jim Wood-Smith, head of research at Hawksmoor Investment Management makes the point well. “There is little that will stop everyone spending quite so effectively as someone saying that we must go out and spend.”

Looking ahead to the ECB meeting on Thursday where it is expected that the interest rate could be pushed even further below zero, Wood-Smith says the market reaction to the event will be “unhealthily important”.

While he says the ‘drug addicts’ have long been demanding the ultimate hit, he speculates that it might be that they might finally hit rock bottom and realise what they are ingesting is actually poison.

“The more that ‘authorities’ tell us that we can have as much cheap or free money as we want, the less likely it is that anyone actually will. This is human nature; we do not want what we can have half as much as forbidden fruit. 

More importantly, he suggests: “The world needs to be told it is normal. So long as the leech doctors keep telling us that we are looking peeky and our blood pressure is too high, the more we believe it. 

He adds: “China is not imploding. The United States is growing nicely. Deflation is a phenomenon of the geopolitics of the energy industry. Negative bond yields are an aberration of misguided and outdated monetary policy. The world is a much more normal place than it is commonly portrayed. This week the otherwise admirable ECB is likely to make a bad mistake by telling the recovering patient that it has had a setback.”

ECB governor Mario Draghi has surprised markets before and there is every chance that he might do so again on Thursday. But, even his power to surprise is only as strong as the market’s belief in the efficacy of the policies the ECB chooses to follow. And, if that is beginning to shift, the risk of policy error is magnified. 

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