The Mortgage Corner
Our Federal Reserve won’t be able to raise interest rates at all this year, or maybe even next year, says Marketwatch. Why? Because the EU Central Bank just announced they are increasing their Quantitative Easing program (QE), and that means the euro’s exchange rate will continue to fall.
Hence exports will be cheaper, helping their export industries (though imports are more expensive), while hurting ours in those industries that are in direct competition, such as the competition for airplane sales between Boeing and. Airbus.
“The logic is very simple, says Marketwatch’s Matthew Lynn. “While the ECB is still aggressively pumping money into the system, it is impossible for other central banks to tighten. Through the currency markets, it would wreak too much havoc on their own economies. And since it looks impossible for rates to rise in Europe any time soon, they are not going to rise anywhere else.”
The EU Central Bank Chairman Mario Draghi is the culprit. He announced additional QE (Quantitative Easing) measures would be implemented, beginning in December, mainly because their retail inflation rate is back in negative territory. The inflation rate has been below the ECB’s 2 percent target since February of 2013.
At a press conference last week, he said the bank was exploring options for expanding QE. The bet in the markets is now that there will be more action in December, pumping more money into the system. If it doesn’t happen then, it probably will early in 2016.
With inflation in negative territory, the ECB is far from its target of getting price growth to near 2 percent and its 60 billion euros ($66 billion) a month asset buys have proven insufficient as lower energy prices and slower growth in emerging economies have worked against it.
“Inflation is just not moving higher, there is a risk of falling into a Japanese-style liquidity trap,” said an ECB Governing Council member.
Doesn’t this sound like former Fed Chairman Ben Bernanke’s rationale when he announced the various U.S. QE purchase programs of government securities? And the result kept us from falling back into a recession, whereas the EU has had 2 recessions since 2008, and in danger of falling into a third, unless prices can be kept from falling further—i.e., into a deflationary spiral that Japan faced for one decade.
The euro has fallen more than 18 percent against the US Dollar, though its exchange rate is still a positive 1.11eu to the $1. It was as high as 1.35eu to the U.S. Dollar in 2014.
The EU is in this position because it didn’t move sooner to stimulate demand after the Great Recession. It was named so because it was a worldwide recession, for the most part, especially affecting the developed countries. Instead, the EU doubled down on austerity measures to reduce debt by cutting government spending. Greece was the poster child for profligacy and so has suffered the most from those austerity measures.
Draghi in his press conference said economic recovery and inflation in the eurozone were likely to be hit by slowing growth in emerging markets. “In this context, the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting, when the new eurosystem staff macroeconomic projections will be available,” Draghi said at the meeting. He added that the Governing Council is “willing and able to act by using all the instruments available within its mandate.”
The emerging markets are especially hard hit with falling commodity prices hurting their resource industries. Brazil is in a full blown recession with negative GDP growth over the past 5 quarters, resulting in a – 2.6 percent annual growth rate in the second quarter 2015.
Harlan Green © 2015
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