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ECB rate decision welcomed

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The European Central Bank has decided to keep interest rates at their current level. Viktor Nossek, Director of Research at WisdomTree Europe, comments that the recovery in the Eurozone is broadening out, with domestic demand finally starting to contribute to economic growth.

The last few quarters have seen this growth providing vital support to cyclical prone exports and the overall strength of Eurozone’s trading partners. Nossek finds that while Eurozone inflation is low, it does not suggest an imminent deflation threat to the economic block.
 
He writes:  “The ECB will require evidence of pass-through effects from the rout in commodities into broader consumer price weakness in order for it to expand its current EUR60 billion in monthly securities purchases. Given that core CPI is well above 1 per cent, and the fact that apart from energy, the largest drivers of consumer price weakness remains to be the housing sector, a component that is gradually recovering, there is little to suggest that there are any broad spill-over effects from slumping crude oil and raw materials, or the weakness in house prices.”
 
Nossek believes that the fear that the current QE program is not already sufficiently supporting Eurozone’s economy, is also misplaced. “Monetary conditions in the Eurozone are clearly improving” he writes, “as evident in the easing of credit conditions to SMEs and the overall expansion of bank lending to the private sector.”
 
The risk of contagion from the volatility experienced in China is also not undermining sentiment in Eurozone’s financial markets and the Fed’s decision to delay its policy rate hike has helped to counter much of macro uncertainty triggered by China, Nossek believes
 
He concludes: “Systemic risks are also dissipating, given how stable bank stocks have been and how the current QE program is successfully suppressing long term yields of peripheral and core Eurozone sovereigns.”
 
 
 
 

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