Friday, May 8, 2009

ECB and BOE moving down the QE path

The ECB cut rates by 25 basis to 1 percent and announced a plan to buy 60 billion euros of covered bonds, pfandbriefes. ECB Head Trichet stated that this was not a floor to interest rates.

The major monetary hawk (or monetary laggard to some) of the developed world has decided to move further into the QE camp. Of course, Trichet has stated that it is not embarking on quantitative easing. While the rhetoric has been about holding the line on inflation through keeping rates above zero, the reality has been that the ECB has been very open about providing funds to banks. Look at their balance sheet. This is not the Bundesbank as consideration away from the largest EU countries has drawn the ECB into active policies based on the output gap. This is a turn around in the policies of the ECB when just a month ago there was talk that direct intervention in the bond markets would not be a priority.

Of course, Trichet also said that it will "never compromise on the anchoring of inflation expectations". Being polite, this could mean many things. It could mean that the ECB is still trying to be hawkish or it could mean that they will increase the money supply to boost inflation back to its target. Some economists say that inflation targeting wold be helpful to ground inflation expectations but this is in the context that there is deflation.

The BOE said that it would further expand its balance sheet through the purchase of 50-125 billion pounds.

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