ECB ‘is in a policy no man’s land’ over economy

Boxed in by its own plans, bombarded with news of a stagnating eurozone and facing strong opposition from the continent’s economic powerhouse, the European Central Bank is in a policy no-man’s-land as its options to revive the region’s economic fortunes dwindle.

That is according to Merrion Stockbrokers’ chief economist Alan McQuaid who, in a bond market review released yesterday, also said that falling German yields are causing concern over a “lost decade” of economic stagnation similar to that experienced in Japan in the 1990s.

Mr McQuaid said that quantitative easing — whereby the money supply is increased in an effort to encourage lending — is the ECB’s sole remaining option to ignite the eurozone economy.

“The European Central Bank is in a policy no man’s land, bombarded by news of a stagnating eurozone economy but hesitant to move forward with new stimulus until measures it announced in June have ignited,” said Mr McQuaid.

“After the ECB cut interest rates in June and promised banks cheap long-term loans starting in September, about all that is left is printing money to buy bonds — so-called quantitative easing.

“But there are tricky practical and political barriers in the ECB’s way: It is boxed in by its own plans, and still faces strong opposition from economic power Germany to any such monetary leniency.”

The continued struggle to lift inflation and contradictory market evidence that investors expect inflation to eventually meet the ECB’s target of just below 2%, suggests that investors see value in the German Bunds — despite the fact that they could lose money on such an investment.

Mr McQuaid also said that Fitch’s upgrade of Ireland’s sovereign debt rate this week has reinforced strong investor sentiment towards Ireland.

“The upgrade underpins the already strong investor sentiment towards Ireland and will widen the potential investor base for Irish government bonds,” he said.

Mr McQuaid said that best value investments lie in Scandinavian bonds, with Norway and Sweden both offering good value.

Iceland, meanwhile, is set to deliver its first budget surplus since its 2008 banking meltdown.