The Tsunami Of Stimulus I talked about last month could begin arriving as soon as today.
The global coordinated reflation effort could be kicked off today with an announcement of more quantitative easing (QE) by the Bank of England (BoE). Yesterday’s downward revision of GDP by the Office for National Statistics from 0.2% to 0.1% has added pressure on Britain’s central bank to help stimulate the UK economy.
The BoE began its first program of QE back in 2009 when it purchased £200 billion worth of bonds using newly created money. The news yesterday that consumer spending fell the most in more than two years makes it even more likely that the BoE will step in as spender of last resort.
It’s also possible that we will see more stimulus today from the European Central Bank (ECB) as Jean-Claude Trichet chairs his last monthly meeting before stepping down as president. The ECB will no doubt be debating two possible policy actions: a reduction in interest rates, or the offer of new credit to banks.
While I think an interest rate cut is unlikely while ‘hawkish’ bank president Trichet is still at the helm, it’s not out of the question. More likely however, will be the announcement of a credit facility allowing banks to borrow from the ECB to help prevent a repeat of 2008 when banks cut lending to each other and to businesses and households.
The ECB is already buying Italian and Spanish government bonds in an attempt to keep their borrowing costs low and prevent higher rates causing a ‘debt contagion’ and it’s only a matter of time before they begin slashing interest rates.
By amassing these potentially ‘toxic’ debts, the ECB is playing a dangerous game and in my opinion, it’s one that won’t end well.