Saturday, September 6, 2014

Interesting chart of EU rates

Yes, European central bankers are different. If we go back in time, Europeans, just two and a half years ago, were actually raising rates. The impact was a slowdown in growth a year later. 

The context of these rate increases do not seem to be very compelling now. What is important is that the slow cautious behavior is in the process of being jettisoned as the ECB tries to play catch-up in a deflationary environment. The rate gap between the US and EU is zero, and there is no room for nominal rates to come down further. The result has been a strong decline in the euro.

The story for the rest of the year is the divergence in monetary policy. Asset purchases are done at the Fed while asset purchases are ramping up at the ECB. The type of purchases will be different through and ABS program but the intent is the same. The ECB wants to be like the BOJ and the more like the Fed of a few years ago.

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