FT: European Central Bank needs more than a light touch
The European Central Bank shone a bright image of a euro symbol on its new Frankfurt headquarters for several days this month as part of a local art exhibition.
The bat signal came to the joy, no doubt, of picture editors around the world, who had grown tired of using the hackneyed image of the dilapidated sculpture outside the old main building down the road.
But if it was intended to be a subliminal instruction to traders to sell euros — a little weakness would go a long way towards supporting inflation — then alas, it has failed.
The euro remains pinned at elevated levels against the dollar, thanks to the eurozone’s sticky current account surplus, the reassessment of the Fed’s likely next moves, the unpredictability of liquidity-starved markets and/or a sprawling secret Group of 20 conspiracy to hold down the dollar, depending on who you talk to and how fond they are of wearing tin hats.
It is also holding firm against the neighbouring pound, too, a key trading-partner currency. You can count on nerves all the way from here to the UK’s EU referendum in June to keep that strength in place.
But that’s not to say the supercharged easing programme launched by the ECB this month has been a flop. The credit markets are in party mode.
Last week, some €30.6bn in new euro-denominated corporate bonds hit the market. Average yields, covering a range of maturities, have plunged below 1 per cent. This is not to be sniffed at.
It is creating wrinkles; there’s a gap emerging between bonds that are eligible for the ECB to buy and those that aren’t. And investors are getting crushed. (Thin liquidity means new buyers have to assume they’ll hold this stuff to maturity at super-skinny yields.)
Of course, the big question is whether this has any effect at all on inflation expectations — the ECB’s true target. It’s a leap of faith on the ECB’s part. On the margins, it’ll help, eventually, but as the central bank never tires of reminding everyone, it is crucial that governments now pick up the baton too.
Otherwise, the ECB might need to shine a big question mark on its outer walls.
