The ECB has kept interest rates at close to zero and extended its bond buying for a while longer as it fights low inflation and slow growth. It appears to us that aggressive monetary accommodation is being kept around for a little longer than would be necessary to address purely economic concerns. But if we consider that its stated political goal is to keep the EU experiment alive, then it makes sense for the ECB to continue priming the economic pump to support the battle against the forces of nationalism and populism.
The purely economic justification for continued aggressive monetary accommodation is starting to look a little thin. The deposit rate at the ECB remains a negative 40 bps., which is to say the European Central Bank charges 40 bps to hold your deposits! Yet inflation is moving up, as last week’s headline inflation print in the EU came in at a very strong 1.9%; the latest GDP print for the EU was an equally impressive 1.8% as of 4Q16. As you can well imagine, this tick up in inflation is not going over well with the Germans!
The political argument for continued monetary accommodation makes more sense, in our view. The United Kingdom leaving the EU is a large blow, but let’s remember the UK joined 15 years late and never really considered itself part of Europe. However, if France left it could spell the end of the EU experiment.
The guards at the castle must have been quite nervous seeing the anti-EU Marine Le Pen doing so well in the French election polls, yet the strong showing of the centrist Emmanuel Macron in the run-off election resulted in a sigh of relief and a rally in the euro and the European stock markets. While the EU cannot directly influence politics in France, the ECB can certainly help blunt the arguments for nationalism and protectionism by pushing growth and inflation. If appears this attack on the castle may prove to be unsuccessful, but we can see the ECB continuing its high level of accommodation for longer than is economical necessary to the help fortify the walls just in case.
Source: ECB, The Financial Time, Bloomberg
Signs of Slowing Economy Continue to Mount
11 Most Read IRIS Articles of the Week!
3 Strategies to Feel More in Control of Your Investments in 2019
3 Life Insights From the Jeff and Mackenzie Bezos Divorce
Weekend Warriors: Ortho Regenerative Technologies Begins Final Animal Studies in Rotator Cuff Repair
Advisors: A New Way to Build Trust With Your Audience on Social Media
4 Tips to Get Over Your Fears of Being on Camera
Top 7 Questions To Identify Core Leadership Skills
How Technology Is Helping Clients Take a Bigger Role Than Ever
What Happens When Labour Gets Commoditized
Markets1 day ago
Long-Term Investors: The S&P 500 Is Not Your Friend. Here’s Why.
Development1 day ago
Again, and Again, and Again: The Way to Build a Great Advisory
Advisor Marketing1 day ago
How to Integrate a Robo-Advisor Offering on Your Website
Equities2 days ago
MIT Says 2019 the Year That Blockchain Goes Mainstream
Sales Strategy2 days ago
The “Polite” Prospect Can Be the Most Difficult Prospect
Human Performance2 days ago
6 Techniques to Close Deals Faster
Markets3 days ago
Is the Market Rising Due to the Lack of Bad News Screaming at Us?
Markets3 days ago
The Early Bird Sells too Soon