Emerging Europe: What If The ECB Implemented QE Tomorrow?
BMI View: If the ECB does opt to enact large scale asset purchases, export-driven Central European economies would adopt activist monetary policy stances to mitigate FX appreciation, whereas Russia and Turkey may stand to benefit from ECB quantitative easing.
Real GDP readings for the first quarter of 2014 indicate that the eurozone recovery is failing to achieve escape velocity, while euro area HICP remains close to zero, increasing the pressure on the European Central Bank (ECB) to loosen monetary policy to ward off the deflationary threat. While the ECB has relied on 'verbal intervention' to soften the euro in recent months, the effectiveness of this appears to be fading with the euro failing to drop significantly below EUR1.37/USD in recent months, increasing the probability that the ECB will need to take hard action in the near future.
We emphasise that we still believe any form of quantitative easing (QE) by the ECB (in the form of large-scale asset purchases of sovereign bonds) to be some way off, as considerable technical obstacles remain in place. Our core view remains that the ECB's actions will probably disappoint financial markets in their scope. Nonetheless, given the distortive impact that major central bank policies can have on regional emerging market economies, it seems prudent to examine the potential impact that unconventional monetary policy might have on emerging European economies.
|Diverging Inflationary Paths Create Different Policy Prescriptions|
|Emerging Europe - Consumer Price Inflation, % chg y-o-y|