|
 The ECB could launch a government bond-buying program with new money
as soon as its Jan. 22 meeting, although Greek elections three days
later are a complication.
With markets in an unusually febrile state - oil and copper have
plunged while the Swiss franc rocketed after Switzerland abandoned
its currency cap - it's a fair bet that if the ECB holds back, there
will be an extreme reaction.
The euro zone's central bank would have no problem justifying
action. It is mandated to deliver price stability and inflation
close to 2 percent whereas this has just turned negative and is
likely to fall further given the precipitous oil price drop.
The ECB won crucial backing last week for its pledge to do whatever
it takes to support the euro when a top European Union court
official said there was no legal impediment to buying government
bonds to bolster a listless euro zone economy.
But politics and German concerns about risk-sharing will trump the
law.
Sources have told Reuters the ECB may adopt a hybrid approach -
buying debt and sharing some of the risk across the euro zone while
national central banks make separate purchases of their own. The
program may also be limited in size to 500 billion euros ($578
billion).
But it is possible that the European court judgment will embolden
the ECB. Executive Board member Benoit Coeure said on Friday that QE
had to be big to have an impact.
"We expect the ECB to announce government bond buying of between 500
billion and 700 billion euros over 18 months that includes all
investment grade government bonds," said Gilles Moec, head of
developed Europe economics at Bank of America Merrill Lynch.
GLOBAL DECELERATION
All is not well with the world economy. Last week, the World Bank
lowered its global growth forecast for this year and next because of
poor economic prospects in the euro zone, Japan and major emerging
economies.
A plunge in the price of copper is a poor harbinger, suggesting
potential problems in its largest consumer China.
The International Monetary Fund will produce its latest economy
forecasts on Tuesday. IMF chief Christine Lagarde sounded downbeat
last week, saying cheap oil and solid U.S. growth were not a cure
for "deep-seated weaknesses" elsewhere.
Even in countries enjoying robust growth - the United States and
Britain - the timing of a first interest rate rise is being clouded.
India, with a healthy economy, has already cut rates in response to
evaporating price pressures.
It suggests more volatility to come with divergent central bank
policies testing the fabric of markets and the economy.
[to top of second column] |
Lower energy costs may well boost consumption in the United States
and Britain but for the euro area, it increases the threat of
deflation. Flash purchasing manager surveys for the United States,
China and the euro zone on Thursday will illustrate the disparity in
their fortunes.
All this should be front and center for more than 1,500 business
leaders and 40 heads of state or government who will attend the
World Economic Forum in Davos, Switzerland.
The WEF said last week the risk of international conflict was now
the biggest threat facing countries and businesses, trumping
economic concerns. That already looks questionable.
Risks seem to abound.
Greece's snap election will take place on Sunday, Jan. 25. The
radical leftist Syriza party has held a consistent lead in the polls
and is intent on ending austerity and seeking debt renegotiation
with its European partners, though it insists it wants to stay in
the euro zone.
There are good reasons to think Greece can no longer threaten the
currency bloc as a whole. But it remains a risk most do not want to
take.
Greek borrowing costs have shot up but ultra-low yields in Italy and
Spain show the bond market buys that view. Whether it continues to
if the ECB falls short remains to be seen.
Moody's cut Russia's credit rating to one notch above junk status on
Friday and Standard & Poor's is expected to go a step further soon
with Moscow facing a deep recession while inflation is forecast to
spiral to 17 percent.
Oil is also a headache for the Bank of Japan which meets this week.
It will add to domestic purchasing power but push the central bank
further away from meeting its inflation goal.
Sources say the BOJ will cut its inflation forecast for next fiscal
year - the deadline for meeting its 2 percent target - to 1.5
percent or lower on Wednesday, keeping it under pressure to expand
an already huge stimulus program.
($1 = 0.8645 euros)
(Editing by Jeremy Gaunt)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
