Friday, September 5, 2008

Central banks stay the course

The ECB and MPC both left rates unchanged in an effort to stay the course for inflation fighting. Look for continued weak economic numbers because no monetary policy help is coming. On the one hand, you have to give a cheer for their fortitude at sticking to the inflation fighting mantra, but the cost will be a continued slowdown in economic growth. Both euroland and Great Britain are looking to be in worse shape than the US. President Trichet is optimistic with a trough in the third quarter and then a "progressive recovery". Given this view, they have a "no bias" view.

The real monetary issue for investors in Europe is the series of changes the financing of asset-backed securities through the ECB in February 2009. A credit crisis is related to the inability of financing to be available to the market, the quantity side of the equation, and not the the pricing of credit, the interest rate. The cutting of credit from the ECB, a shadow monetary easing is more relevant than the lowering of rates. In fact, the stock market sell-off of financials may have been due to this tightening of credit supply. Borrow now because the window is closing early next year.

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