Decision Time For ECB, BoE And Greece

Last week was characterised by better than expected macroeconomic data, giving a boost to equities and broader risk assets. The improvement in the data has been significant for the economic trajectory of the global economy and for the consideration of policy at the three national central bank policy meetings this week.

First, however, the major focus of markets is directed at the Greek government as they rally to meet the deadline and show united political commitment to further reforms and austerity in order to receive a new aid programme sanction from Troika (European Commission, ECB and IMF). Snow may be falling across Northern and continental Europe but dark clouds are forming over Greece!

Despite the gradually improving macro economic backdrop, it is likely that global central banks will still commit to extraordinarily loose monetary policy to facilitate global bank recapitalisation and a nascent recovery in growth at the same time. This week we have three central bank meetings from G10.

ECB unchanged?

While I am of the opinion that we are not at the bottom of the interest rate cycle in the eurozone, I would hesitate to suggest that the ECB under Mario Draghi sanction a further rate cut at this stage. In my mind Mr Draghi is likely to hold fire on rates at the current juncture and instead instil an easing bias through the focus on the second ‘non-standard’ 3y LTRO at the end of February, which will likely take the liquidity of the combined operations to somewhere around EUR 1 trillion. I still very much see the eurozone as the global economy’s growth laggard and as such I would expect the ECB to sanction a rate cut at some point in the first half of this year (most likely March) but a policy of wait and see, particularly with so many unanswered questions surrounding one of its members (Greece), is most likely the right response.


In the UK the economic backdrop has improved significantly of late and whilst there are still many looking for further downside in the UK I remain among the most positive. As I see it with demand beginning to rise, inflation starting to fall back sharply and the money supply if anything falling, an expansion of the money supply in terms of another round of QE from the Bank of England should be seen as a positive for GBP. A number of commentators have, in light of recent positive data, reigned back their expectations for the size of monetary stimulus to around the GBP50 billion level. I would still expect a GBP75 billion injection of liquidity to be ‘spent’ at a similar pace to the previous GBP75 billion and for that to set up a significant growth spurt for GBP in the second half of 2012.

For the day equities and risk sentiment are likely to be the dominant barometer with all eyes on Greece and the resultant Troika verdict.


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