ECB out of line with BoE, BoJ and Fed despite eurozone woes

26th April 2013

The European Central Bank is looking increasingly isolated when compared with the other three big central banks globally says Iain Stealey, portfolio manager at JP Morgan Asset Management.

He says: “The Bank of Japan has surprised markets this year with their aggressive monetary easing program which equates to bond buying worth 19% of GDP annually and the doubling of their monetary base, while the Federal Reserve continues to buy $85bn of US Treasuries and mortgages on a monthly basis. The Bank of England has re-joined the easing party by announcing extensions to the Funding for Lending Scheme and this is even before the new Governor starts his role at the beginning of July, when we expect him to look at additional forms of easing.”

Stealey, who works on the fund firm’s global multi-sector income strategy, says: “Ironically, when we look at our leading indicators and monetary policy tools it is the ECB that should really be leading the way with aggressive easing. In contrast to the other central banks, due to the repayment of long-term refinancing operation (LTRO) monies, the ECB has contracted its balance sheet this year.”

He adds: “This week’s eurozone PMI and German IFO data show a region that is struggling to exit recession and the ECB bank lending survey shows that banks remain cautious about lending due to concerns surrounding the economy and future loan losses. This is all is line with the IMF’s downgraded growth projection for the Euro area from -0.2% to -0.3% for 2013. The question remains as to what the ECB can do within their mandate? “Extensive” discussions occurred in last month’s meeting over whether to cut rates, although the impact is likely to be limited with Euro OverNight Index Average (EONIA) and core yields already trading near zero.

“Under President Draghi’s watch the ECB have become very creative in easing policy, through LTROs and the Outright Monetary Transactions (OMT), and it remains to be seen what else they come up with to support the Euro area.”

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