Is the ECB Copying the Fed in Providing Guidance Now?


The European Central Bank recently stated that it will keep interest rates at “lower levels for an extended period of time”. (1) The bank has actually been doing this for some time, but the fact that the statement was made with respect to future guidance is something new. Does this sound familiar? It sounds like the Fed strategy after the 2008 market correction. The Federal Reserve kept interest rates low for a number of years, and only recently began to signal that it may change its course. The irony is that the ECB is trying to differentiate itself from the Fed, and yet it is doing exactly what the Fed did some time ago. (1)

What can be gleaned from this? There are a number of possibilities. The first one is that the austerity measures being tried in Europe are a dismal failure, and there is now a shift toward growth and stimulus as solutions for the economic malaise. The second possibility is that the Fed policy is perceived as successful and the ECB policy has not been successful, so why not emulate what works? The third option is that the situation is getting more desperate in Europe and if its policy is not changed quickly, there could be unintended consequences. An offshoot of this idea is that since the Eurozone economy is getting desperate, some reassurance has to be made regarding the forseeable future, and not just the present time. There is also a fourth possibility that the Bank of England made a similar statement and the ECB is copying it. (1) There may be other possibilities that are not evident yet.
Another thing that can be gleaned from this statement is that it is very significant. Why after many years would the ECB start providing future guidance for the first time in its history? There have been some recent warning signs that Europe may be heading for a renewal of the PIIGS crisis. Italy is being pushed for further reforms (4), Germany is now lending to Spanish businesses (2), and Portugal had a bond yield spike which spooked the markets. (3) All of these events happened within the same week as the ECB guidance so the fear seems to be increasing overall.

In any event, this new ECB guidance should be noted because as the future unfolds, it will be looked upon as a turning point.

Sources:

1)      http://www.telegraph.co.uk/finance/economics/10159768/ECB-issues-unprecedented-forward-guidance.html

2)      https://mninews.marketnews.com/content/germany-spain-sign-e800-mln-loan-agreement-spanish-smes

3)      http://www.dw.de/portugal-markets-recover-as-leaders-look-to-defuse-crisis/a-16929245

4)      http://www.reuters.com/article/2013/07/04/italy-imf-idUSL5N0FA34420130704

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About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

One Response to Is the ECB Copying the Fed in Providing Guidance Now?

  1. Is the ECB Copying the Fed in Providing Guidance Now? | Joe The Investor

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