2nd August 2012
First up was the Federal Reserve. The optimists may have hoped for more action in the face of declining economic growth, but as it was the Fed said they needed more data and kept monetary policy unchanged. However, they kept their options open:
"Central bankers led by Ben S. Bernanke concluded their two- day meeting Wednesday saying they "will provide additional accommodation as needed" to bolster the expansion. The Federal Open Market Committee also said it will "closely monitor" economic data and financial developments, suggesting it is focused on the economy's near-term performance."
Bank of England
The Bank of England had been urged by, among others, the British Chamber of Commerce and the IMF, to consider pushing rates lower: "The MPC could also consider introducing a reduction in the rate paid by the Bank of England on deposits held by commercial banks. This could discourage hoarding and may provide a useful incentive to increase lending."
However, there is an increasing recognition – demonstrated by rumours of the nationalisation of RBS – that poor lending practices are as much to blame as the level of interest rates.
As it was the Bank of England's Monetary Policy Committee decided to leave interest rates at the record low level 0.5%, and its asset purchase programme (QE) at £375 billion. Despite the dreadful second quarter GDP figures, the Committee had only just raised the asset purchase programme by £50bn, so was unlikely to extend the programme so soon.
Azad Zangana, European Economist at Schroders, said: "The Bank of England will publish its updated forecast fan-charts for growth and inflation next week in its Inflation Report, which will provide markets a signal of the prospects for more quantitative easing, or even a further cut in interest rates, as has been called for by the IMF. However, we expect the Bank of England to remain in 'wait and see' mode, especially as it will want to assess the impact of the government's 'Funding for Lending Scheme', which started yesterday."
European Central Bank
But all eyes were firmly focused on the Eurozone: "The Fed's "do-nothing outcome was largely priced in. There was less pressure on the [Fed] because there is more pressure on the ECB," Tim Condon, economist at ING, said in a note.
Expectations had been raised by European Central Bank President Mario Draghi, who pledged a week ago that the ECB would ‘do whatever it took' to save the Eurozone. For many this meant the ECB deploying its own balance sheet to prop up the single currency while policymakers work on closer integration:
"Draghi has unfortunately painted himself into a corner," JP Morgan analyst Pavan Wadhwa said in a conference call. "The ECB does need to demonstrate its credibility… Otherwise Draghi will lose face completely."
Reuters suggested that the ECB had little margin for error to maintain its credibility and avoid bond yields climbing to unsustainable levels in the indebted countries on the euro zone periphery. Spanish 10-year government bond yields were back up to 6.65% in today's trading.
The main option being considered, according to Reuters, is re-activating the ECB's bond-buying program for Spain and Italy in tandem with the euro zone's rescue funds. The FT outlines a number of other options here. Either way, the market was expecting some form of sovereign debt support.
As it was, none of that was forthcoming. There was no banking license granted to European Stability Mechanism – this would be ‘illegal' according to Draghi. Interest rates remained unchanged and there was no attempt to equalise sovereign bond levels across the Eurozone.
There were plenty of promises. Draghi said that more initiatives would be announced over the next few weeks, including something to address the problem of seniority. He also said that the bond-buying programme would resume but that it would be, ‘different to the Securities Markets Programme (SMP), which involved buying large quantities of government bonds from banks and other financial institutions on the open market.' The programme would be focused on shorter-term bonds.
He reiterated that individual Eurozone countries had to help themselves: "Policymakers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination."
Mindful Money's economist Shaun Richards suggested earlier this week that Draghi might not deliver fully on his promises.
Draghi's remarks are given in full here.
The markets had hoped for better and slumped almost immediately after Draghi's speech. It may take a few days to digest the speech in full, but investors have already given the actions of central bankers their verdict.
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