ECB Pushing On A String

Hamstrung by a restrictive mandate that prevents discretionary intervention, the European Central Bank (ECB) has, in recent years, been forced to exploit loopholes in its statute and adopt a gritted teeth approach to monetary policy. As a result, official policy has been cumbersome and reactive, rather than flexible and proactive.

With this in mind, it came as a surprise that the ECB opted to cut the refinancing rate by 25bps to 0.25% on November 7, which atypically caught the market off guard. We recently highlighted the increasing likelihood of a rate cut by the end of this year, with fears mounting over a possible slide back into deflation (October's inflation figure came in at 0.7% y-o-y), but we only expected action to come in December.

Thursday's move, combined with the release of higher-than-expected US GDP growth figures for Q3 2013, has jolted markets, with the euro sliding to US$1.34/EUR at the time of writing and interest rate futures rallying.

We stress that the rate cut will have little impact in overcoming both deflationary conditions and the broken credit transmission channel across the eurozone. Without serious structural economic and banking reforms, the ECB will remain under pressure to ease monetary policy further, with an additional burst of liquidity through long-term refinancing operations likely to emerge in 2014.

This Week's Trivia Question

Last week's questions had a Halloween theme and were as follows: Which national leader was quoted [last] week as saying that an image of his predecessor had appeared to workers on a wall of an underground railway construction site in the middle of the night? And which separate national leader, who was elected in 2012, had still not moved into his official residence (according to the last such media reports in August), amid rumours that it is haunted? The answers are a) Venezuelan President Nicolas Maduro, referring to Hugo Chavez, and b) Japanese Prime Minister Shinzo Abe.

This week's question is as follows: What major work of American literature is among the small number of foreign titles available as e-books on North Korea's new Samjiyon tablet computer? (Hint: the book portrays a conflict which may have analogies with the Korean Peninsula's own modern history.)