In light of the incoming ECB meeting this Thursday, CEO of JDI Research and Macro Hive reader Juliette Declerq outlines her pessimistic view on Central Bank policy. As she points in her latest report, which we discussed last week, the prolonged period of extreme dovishness is damaging, with negative rates triggering a vicious cycle. Sovereign debt levels in the developed world are higher than pre-crisis, but the ratio of interest rates to GDP is much lower. Declercq predicts a new wave of stimulus, but given the exhaustion of monetary tools the ECB is likely to pass the bat to fiscal authorities, steepening the yield curve further. In other words, get fiscal or get a crisis.
Why does this matter? The Euro fell to a five-day low on Monday in anticipation of further stimulus on Thursday – either in the form of a cut in interest rates, or purchases of government bonds or other European assets. Perhaps both. Some analysts suggest the ECB will start buying euro zone equities, not just government bonds, in a new wave of QE. However, we see the Eurozone in better shape than generally portrayed, and given that previous stimulus has been lukewarm at best, further dovishness might be unjustified.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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