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WisdomTree finds little evidence of disinflationary environment in Europe worsening


Responding to the latest announcement from the European Central Bank, Viktor Nossek, director of research at ETF provider and issuer WisdomTree Europe, comments that a relatively upbeat assessment of Eurozone economic growth, set against the impending additional stimulus measures of CSPP and TLTRO2, should work to counter threats to growth and inflation caused by weak commodities and downbeat economic growth within emerging markets.

 “Now all eyes are on the implementation of CSPP and TLTRO2 later this month, and this should provide a major boost to credit growth and help accelerate domestic demand-led growth, with banks expected to more enthusiastically take up interest-free ECB loans in the face of diminishing carry trade opportunities,” Nossek says.
“There is still little evidence of the disinflationary environment worsening, meaning the main threat for Europe remains a political one, with the danger that Europe’s political union fractures and thus undermines the ECB’s policy to instil market confidence, sustain the economic recovery and strengthen economic growth. A Brexit vote falls under this category, and if it materialises it could delay the recovery further, forcing the ECB to extend its expansionary monetary stimulus package well beyond March 2017.”
The end game for Europe is that in all likelihood the ECB is looking to complement and calibrate monetary policy with the fiscal stimulus put in place by the European Commission, Nossek believes.
“With much of the government debt which matures over the next one to five years now paying a negative yield, artificial fiscal easing is already being provided by the ECB, allowing governments to refinance debt on the cheap (indeed effectively get paid to borrow) and thus expand their fiscal budgets.
“Indeed, behind the veil, the ECB’s (private) goal of suppressing the interest rate environment for very long dated debt will be achieved by the triggering of public and private sector investments and infrastructure spending.”

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