Saturday 21 June 2014

IMF calls for QE for euro area amid collapse in market volatility

The International Monetary Fund has suggested that the European Central Bank implement quantitative easing. From Bloomberg on Friday:

“If inflation remains stubbornly low, the ECB should consider a large-scale asset purchase program,” the Washington-based IMF said in an assessment of the euro-area economy. “This would boost confidence, improve corporate and household balance sheets and stimulate bank lending.”

Speaking to reporters in Luxembourg late yesterday after making the recommendations to euro finance ministers, IMF Managing Director Christine Lagarde said inflation’s resistance to the ECB’s latest measures would represent the “stubbornness” that triggers quantitative easing.

Adding to the concerns about the eurozone economy, a report from the European Commission on Friday showed that its consumer confidence index for the region fell to minus 7.4 in June from minus 7.1 in May.

And yet, European stocks have been performing well. The STOXX Europe 600 Index rose 0.3 percent this week and is trading near the highest level since 2008.

Therein lies the dilemma for the ECB. From Bloomberg:

The European Central Bank’s unprecedented effort to fend off the threat of deflation has brought volatility in financial markets to a standstill. Policy makers aren’t so serene.

Price swings in euro-area bonds and equities have collapsed, borrowing costs for the riskiest issuers reached record lows and Cyprus accessed funding markets just a year after receiving a bailout. Rather than congratulate ECB President Mario Draghi, officials from Britain to the Bundesbank say persisting with the easing policy for too long may store up trouble.

“There’s a general discussion of whether investors are getting too complacent about risks,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “At some point we are likely to reach levels that could not give proper compensation for the risk people are taking. This is similar to what happened ahead of the financial crisis.”

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