Will ECB policy remain unchanged or get US-style? Threadneedle’s Harvey comments

Martin Harvey, fixed income fund manager at Threadneedle Investments about ECB monetary policy meeting coming up in the next days.

The European Central Bank will announce the outcome of its latest monetary policy meeting tomorrow following an alarming fall in inflation to levels not seen since late 2009. Expectations have heightened that the ECB will act tomorrow or in December to quell fears that the spectre of deflation is embracing the Continent. The options facing the ECB range from leaving policy unchanged (based on the argument that the depressed level of inflation is transitory and is actually positive for consumption) to US-style QE. But the latter remains a distant prospect.

It remains uncertain whether the central bank will act this week and any intervention that does take place is likely to be verbal in nature. The policymakers could, for example, say that “inflation risks are to the downside” rather than the current view that inflation risks are “broadly balanced”. This would provide an important signal to the markets and highlight an imminent policy response. Alternatively, they could extend forward guidance to highlight the inflation threshold.

The Council have been uncomfortable with such suggestions in recent months, but a signal that rates will remain low until CPI is above 1.5%, for example, is an option. It would have the effect of pushing bond yields lower. Overall, however, the response is unlikely to be as aggressive as is required and the situation Europe, and especially the periphery, bear comparisons with Japan’s deflationary experience. For all the gains in competitiveness, nominal GDP growth that is curbed by falling prices will put further pressure on ever-rising government debt-levels. That will become a problem at some point.

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Viola Caon
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