QE is still an Option on the Table for the ECB

QE is still an option on the table for the ECB

Mixed data poured out of the Euro Bloc last week. Although the unemployment rate has decreased by 0.1% (Actual: 11.5%, Forecast: 11.6%, Previous: 11.6%, 31/07/2014), Spanish and Italian manufacturing PMI were below par (Actual: 53.9, Forecast: 54.8, Previous: 54.6, 01/08/2014 and Actual: 51.9, Forecast: 52.8, Previous: 52.6, 01/08/2014 respectively). This shows that there still exist structural problems that the Spanish and Italian governments need to address. The ECB's (European Central Bank) measures (negative deposit rate, interest rate cut etc.) in June will have a delayed impact on data. If the data ceases to improve after a couple of months then we could see the ECB resort to other methods to stimulate growth. One of the options on the table is QE (Quantitative Easing), which will help stimulate growth, weaken the currency and help with low inflation. QE is seen as a last resort by the ECB, but it looks more and more likely that the ECB will use it. We expect the ECB to keep current interest rates at 0.15%. We expect this week's data to be a mixed bag, just like last weeks.

On the other hand, even though the Yen is weak and other economies abroad are recovering, exporters are not benefitting. This is one of the major concerns that Japan faces. This is to do with structural factors that the Shinz┼Ź Abe (Prime Minister of Japan) will need to address. QQE (Qualitative and Quantitative Easing) is meant to ensure Japan reaches its 2% benchmark for inflation. However, inflation only reached 1.3%, (excluding the sales tax hike, which adds 2% to the CPI data 25/07/2014) which was 0.1% below the previous reading. This is causing some uncertainty amongst investors as it shows that QQE might be failing. Nevertheless, the BOJ (Bank of Japan) will adjust monetary policy according to this data (CPI). In other words, Haruhiko Kuroda (Governor of the BOJ) is likely to state during the press conference that additional easing will be implemented if inflation remains stagnant. Due to the lack of Japanese data this week, words will speak louder than numbers, which Haruhiko Kuroda should bear in mind.  

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