The Week In Hindsight 21 February 2014

French and German price indexes showed price pressures within the economy weakening faster than expected this week, underlining the potential for a further interest rate cut to come in March.

In addition to weakening prices, manufacturing and services PMI’s for the continent’s two leading economies showed the pace at which order books across French and German businesses are slimming down increased during January.

Despite notable improvements, the European economy still has some way to go before it will have caught up with those of the UK and US. As recoveries quicken elsewhere in the world, many have criticised European policy makers, along with the ECB for the lack of stimulus provided throughout the years immediately following the crisis.

The ECB was among the slowest to reduce rates when the bloc’s economies were crashing and in order to avoid a prolonged period of stagnation, many analysts now consider it imperative that the bank reduces rates further in the absence of being able to replicate the quantitative easing programs of the UK and the US.

The consensus opinion is that rates will come down in March. Our view is that although this is a possibility, it is not the most likely outcome.Given that rates currently at 0.25%, the ECB is close to running out of ammunition and with the legal decision regarding the bank’s OMT policy now referred to the European Court of Justice; it is unlikely that policy makers will be able to go ahead with a continental equivalent of quantitative easing any time soon. In order to avoid losing its only paddle in the middle of the stream, we believe it is more likely the ECB will hold fire until later in the first half of this year.

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