ECB readies big guns as September rate cut beckons
The European Central Bank (ECB) will deliver both rate cuts and will pump yet more money into the eurozone’s ailing economy next month.

The disclosures came in the minutes of the ECB’s July meeting, the final one to be headed by Mario Draghi, who is credited with rescuing the euro after his 2012 pledge to “do whatever it takes” to support the currency.

While the outgoing president of the ECB may have prevented the break-up of the eurozone, the bank’s zero-rate policies and €4.65trn of cash injections have failed to lift the economies of the 19-country bloc, and they are again facing a recession in the making.

That is in sharp contrast to the US, where strong growth has given the Federal Reserve more room to boost the economy, although it likely has less need to do so than the eurozone, where bond yields for many countries are mired in negative territory.

The performance of Germany, the industrial powerhouse of the EU, looks to be even worse than that of the UK, where the self-inflicted wounds of Brexit are slowing the economy.

After the German Purchasing Managers Index reading came in at 43.6 in August, expectations are that its economy will have contracted for two consecutive quarters by the end of September, while the UK will have bounced back from the output it lost in the second quarter of the year.

“Signs of stabilisation are few, and the question remains if the manufacturing sector recession will spill over to other parts of the economy, delaying a potential recovery later this year,” said Jeroen Blokland, a portfolio manager at Dutch asset manager Robeco.

With the ECB set to cut and possibly take its key rates below zero, that puts it at odds with the Fed. The US central bank indicated in its own minutes, issued on Wednesday, that its one interest cut had been for insurance purposes, and its rate setters were deeply divided on whether additional cuts were necessary.

The Fed could, at most, deliver another half a percentage point of cuts, based on its current projections, versus market pricing of cuts up to 1-1/4pc by the end of next year.

That raises the question once more as to whether the world economy can fully recover when the Federal Reserve and the ECB are pulling in different directions.

They did so in 2011 and from 2015 onwards, when the Fed embarked on a sustained series of interest rate rises.

The difference between the two central banks did not escape US president Donald Trump, who has criticised the Fed and says that ECB cuts are aimed at deliberately weakening the euro.

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