Carney Tells Them How it is
Mark Carney weighed into European politics last night, with a couple of fairly straight forward messages for Germany and the wider Eurozone. Germany should be less frugal and increase spending and therefore debt issuance in order to stimulate demand, “it is difficult to avoid the conclusion that if the euro were a country, fiscal policy would be substantially more supportive” said Mr Carney. The wider eurozone should behave more like a United States of Europe, where monetary union combines with fiscal union and becomes more effective “it is no coincidence that effective currency unions tend to have centralized fiscal authorities whose spending is a sizeable share of GDP”.
Mario Draghi will have liked what he heard, but it’s definitely a point that has been raised before (and not acted upon). Perhaps Germany’s hand will be forced if Greece erupts. Yesterday their stock market plunged yesterday after Alex Tsipras’ first cabinet meeting as leader left markets concerned that despite their being no intention for a “mutually destructive clash” Mr Tsipras does seem keen to “not disappoint the voters who gave us a mandate”.
Greece isn’t just causing headaches from their own problems. Yesterday they broke rank from Cameron, Merkel and Hollande’s meticulous European unification against Russia and said “we are against the embargo that has been imposed against Russia… we have no differences with Russia and the Russian people”. What must Brussels be thinking?
The Doves flying around the globe
Investors are starting to notice a pattern of pessimism in the words and actions of central banks.
New Zealand joined other dovish central banks and removed any hint of hawkish future monetary policy. They join countries such as Canada and Australia in beating a retreat from rate rises as falling commodity prices hurts their inflation prospects. In Norway, banks are already offering discounted mortgage rates with the expectation that the Norges Bank will cut rates as oil prices hammer the economy.
Even the Fed has chosen to be slightly more dovish, as they left key wording in their rate announcement statement yesterday that ruled out any chance of a rate rise before June. Central banks taking on a more dovish tone is likely to heighten emphasis on currency wars, by where driving down currency prices not only stimulates demand, but creates inflationary pressures by increasing the cost of commodity imports.
Mark Carney also said yesterday that inflation in the UK is likely to turn negative for a short while, before picking back up in the next 12 months. Oil prices are probably the largest influencer on UK inflation and yesterday they touched another low, not seen since March 2009.
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