Ashburton’s Derry Pickford sees disappointment with central bank actions on growth

Derry Pickford, macro analyst at Ashburton, believes that a number of central banks are arguably doing too little too late to promote growth.

A quarter of a percentage point with a hint of another cut soon: is the ECB doing enough to stimulate a stagnating economy?

Mario Draghi also promised to continue with “full allotment” (whereby banks can refinance at the ECB at maturities between 2 week and 3 months without limit provided they have allowable collateral) until the end of Q2 2014, and announced consultations on a new scheme to kick-start the Asset Backed Security (ABS) market in Europe. However, by the end of the press conference the market was left distinctly disappointed, with bank and peripheral equities down, peripheral bond yields up and the euro weaker. So what went wrong?

In answer to a question about the new ABS scheme, Draghi emphasised what the ECB can’t do: “supplement government for their lack of structural reforms”, “clean up bank balance sheets”, and buy government bonds. He then went on to suggest that other institutions such as the European Commission and the European Investment Bank would need to guarantee any loans that the ECB takes on to its own balance sheet under this new ABS programme. He also gave the impression of a powerless ECB: “We don’t go around with helicopter money, throwing money around. In Europe, you have to go through banks. You don’t have capital markets of the kind you have in the United States, so that we have to proceed via the banking system.”

Is bank dominated financial intermediation really a barrier to Quantitative Easing?

Mr Kuroda, the new governor of the Bank of Japan, doesn’t seem to think so. At the end of 2012, the ratio of outstanding bank loans to non-financial securities was nearly five; a far bigger ratio than in the eurozone. However, Kuroda plans on massively expanding the Bank of Japan’s balance sheet so that, by the end of 2014 it will be bigger relative to GDP than any of the major central banks. The ECB’s balance sheet has, of course, been contracting since last summer. The ECB defends on the basis that European banks no longer need access to their various refinancing facilities since they were able to restore confidence to the markets with the Open Market Transactions (OMT) programme.

Proving that QE helps stimulate the real economy rather than just distorting financial markets is difficult: running controlled experiments in economics is of course impossible. Nonetheless, there are signs that it does help business confidence: since the prospect of Abenomic’s monetary arrow there has been an enormous turnaround in Japan’s PMI whilst Europe’s has remained flat, despite OMT.

The real reason for the ECB’s reluctance to engage in QE is more likely pressure from the Bundesbank which is already uncomfortable with OMT. Pressure from the Bundesbank means the ECB continues to remain behind the curve.

Mr Chidambaram, the Indian Finance minister, probably feels that the Reserve Bank of India (RBI) is also doing too little, too late as well: at least for his Congress’ party’s chance of re-election if not for achieving price stability, cutting rate by 25 bps when many in the market were hoping for more in an attempt to boost growth. The RBI’s annual statement was far more focused than usual on the CPI, which remains stubbornly higher than the Wholesale Price Index (WPI) which the RBI normally targets, suggesting that substantial further easing will not be forthcoming. To rub salt into the wound they also revised their growth target for this fiscal year down to 5.7% a full percentage point below Chidambaram’s own target.

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