European Central Bank president Mario Draghi. Photograph: Jean-Christophe Verhaegen/AFP/Getty Images Photograph: Jean-Christophe Verhaegen/AFP/Getty Images
European Central Bank president Mario Draghi. Photograph: Jean-Christophe Verhaegen/AFP/Getty Images Photograph: Jean-Christophe Verhaegen/AFP/Getty Images
Time to wrap up for the day. Spanish 10-year yields have surged to 7.224%, up 48 basis points, while Italian yields are up 40 bps at 6.335%
The FTSE 100 index in London has closed down 50.52 points at 5662.30, a 0.9% fall. Germany's Dax has tumbled 2.2% to 6606.009 while France's CAC is 2.7% lower at 3232.46.
Spain's Ibex has crashed 5.2% to 6373 while Italy's FTSE MiB lost 4.6% to 13282.55.
The euro has also tumbled, losing 1% against the yen.
Thanks for all your great comments. We'll be back tomorrow, as usual.
Germany's economic minister welcomed Draghi's comments today that the eurozone's new bailout fund is barred by European law from tapping the ECB for funding.
France, Italy and others have been pushing for the permanent rescue fund, the European Stability Mechanism (ESM) to be given a banking licence that would allow it to borrow without limit from the ECB. But Germany, Europe's paymaster and largest economy, argues that this would be illegal as it would amount to ECB funding of national deficits.
Philipp Rösler said:
Monetary policy cannot be a substitute for nations' own efforts in financial and economic policy and for this reason it can offer no sustainable resolution of the crisis.
I fully concur with [Draghi] that a determined policy of fiscal consolidation and reform at the national level... is essential for calming the debt markets.
Rajoy, the Spanish prime minister, said after a meeting with the Italian premier that it was important that the ECB stood ready to intervene in markets to lower their countries' surging debt costs
However, when asked three times by reporters after a press conference whether Spain would activate EU mechanisms aimed at buying up sovereign debt, he merely said he welcomed the ECB's statement that it would use non-convential measures and was working on implementing EU summit decisions.
Ominous... Monti says he doesn't know if Italy will request EU help to bring its government bond yields down - currently at 6.273%, up 34 basis points today. The Spanish ten-year yield has jumped 42 bps to 7.164%.
Rajoy and Monti have started their joint press conference. The Spanish prime minister says Spain and Italy are calling for a swift implementation of the decisions taken at the recent EU summit.
Given the state of Spanish bond yields, it is tempting to read some symbolism into the fact that the massive Spanish flag in Plaza de Colon, Madrid, fell to the ground today... El Mundo has a picture and the full story.
On Wall Street, the Dow Jones is down some 30 points at 12941, a 0.25% fall.
And gold prices have dropped to one-week lows. Draghi's comments last week that he would do whatever necessary to protect the euro drove bullion to $1,629.10 an ounce, the highest level since mid-June. But after today's flop, gold was back below $1,590 an ounce.
Here is some more analysis of the ECB's (lack of) action from Nick Kounis, head of macro research at ABN Amro.
ECB President Mario Draghi announced that central bank bond purchases to bring down peripheral government bond yields are strictly conditional on governments moving first to activate bond buys by the EFSF/ESM, which itself would require governments to commit to the necessary fiscal and structural policies. In addition, many of the details of what the ECB would actually do have still be worked out by committees.
This message has disappointed financial markets following the euphoria after Mr Draghi’s London speech because it signals that it will take some time for the ECB’s action to materialise. In effect the fastest institution in the eurozone has tied itself to one of the slowest. On the positive side, when action finally does come through, it looks likely to be more sizeable than past bond buys by the SMP. Indeed, an ECB/EFSF double act could eventually have a more significant impact on bond markets than the actions of the ECB in the context of the SMP in the past.
Thanks Jo. Stock markets still down after the ECB disappointment. As Marc Ostwald, strategist at Monument Securities, noted, "Draghi macht schlapp" ("Draghi flops") would make an appropriate headline for the German press.
The FTSE is down 13 points, or 0.2%, while Germany's Dax and France's CAC have both dropped by more than 1%.
Julian Callow, chief European economist at Barclays:
We interpret this as a clear sign that the ECB is prepared to change policy significantly at its September meeting, in terms of purchasing debt without claiming seniority subject to the EFSF being deployed to buy government debt. Overall this is in line with our expectation; it still will depend on whether Spain and Italy (which have a summit now proceeding) will call upon the EFSF to do this.
The council is clearly not in agreement on what can or will be deployed ("modalities to be discussed/decided"), and there are clearly a number of council members who are making further ECB action contingent on govts delivering on their side of the equation ("first of all governments need to go to the EFSF; the ECB cannot replace governments) and therefore whatever the ECB does will not be QE.
He notes that the yields on certain government bonds (which he refers to as risk premia) have reached exceptionally high levels.
In order to create the fundamental conditions for such risk premia to disappear, policymakers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination.
As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM [bailout funds] in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.
He says governments must adhere to their commitments as a necessary condition of receiving help. Once all those conditions are met...
The Governing Council may undertake outright open market operations of a size adequate to reach its objective.
Draghi highlighted the word "may" during the press conference. This was not a decision, he said, but rather a framework in which to act.
Crucially, Draghi suggested the bailout funds would not necessarily push other creditors down the pecking order if it buys bonds in order to help keep borrowing costs down.
In this context, the concerns of private investors about seniority will be addressed.
Draghi notes, whether the ECB announcement sparks hope or panic is a "matter for psychoanalysts", what dictates governing council decisions is cool-headed analysis of the facts.
Draghi reiterates that Italy and Spain have to request bailouts (with conditionality) to get EFSF/ESM and ECB assistance. Food for thought for Monti and Rajoy who are expected to give a press conference at 3pm (BST) today.
Draghi says there wasn't anything specific that pushed the bank to discuss these so-called 'non-standard measures'.
There was just a sense of worsening of the crisis, and worsening of the consequences of fragmentation in the euro area. One thing was the sudden increase in the shorter part of the yield curve [i.e. yields going up on shorter-dated bonds] in several countries in the eurozone.
Bond investors seem largely unimpressed. The price of 10-year Spanish bonds fell pushing yields up to 6.78%, while yields on the Italian 10-year have reached 6.1%.
My colleague Simon Neville reports on market reaction in the UK:
Throughout Draghi's speech, the FTSE went up and down rapidly. As he jovially welcomed the assembled press, the leading market was up 25 points, 0.4%, on the day and jumped a further 25 points, 0.8% on the day, hitting a 16 week high of 5,766. But as excitement waned, it began to drop, wavering around the level at the start of the conference, before going into negative territory for the first time today, down 47 points from the opening to 5,665. That's a 100 point drop in a matter of minutes.
Draghi says -This guidance we have given is different from the previous bond-buying programme. Governments must meet their commitments to fiscal reform to benefit from the programme. Draghi adds that the programme will focus on shorter-dated government bonds.
It is an effort which is very different from the previous [bond-buying programme]. It falls squarely within our mandate, and among the instruments of monetary policy.
So the key points are that the bailout funds will intervene in the bond markets, and they will address the issue of seniority. This means that other bondholders will not necessarily be pushed down the pecking order by the ECB or the bailout funds buying bonds
Pawelmorski, for one, thinks this is a good result.
FFS people. They're going to buy bonds and 'address seniority'. Do you really need a fecking pony as well?
Draghi says - The main downside risks [to the eurozone] relate to the impact of weaker than expected growth, down to further intensification of tensions in the financial markets.
Draghi adds: "Concerns of private investors about [ECB] seniority will be addressed."
He expects growth in the euro area to be dampened by tensions in euro area sovereign debt markets. High unemployment will also weigh on growth, which is also affected by the global growth slowdown.
The ECB governing council discussed policy options, with regards to the bond markets, extensively. Exceptionally high risk premia have been observed in government bond prices in several countries. That hinders monetary policy, he says.
These bond yields are “unacceptable”. He repeats the fact that the euro is irreversible.
And we're off, journalists are gathered and muttering amongst themselves, but still no sign of Draghi. Some off-the-wall guesses as to what might happen next.
#ECBGuesses Draghi walks in wearing an 'Ask me about Spanish money supply' T-shirt
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 pm CET todaym [1.30pm BST].
The euro rose against the dollar on the news that the ECB kept rates on hold, from $1.2264 to $1.2285. European stock markets lost some of their earlier gains.
No surprise that the ECB kept rates on hold. The interesting bit should come at 1.30pm (BST), when Draghi will hold a press conference and possibly announce more stimulus measures. Investment website zerohedge notes:
The rate announcement is not the surprise: virtually nobody expected a cut which would have taken the deposit facility to a negative rate and the monetary Twilight Zone. Where the surprise will come is what Draghi announces at the press conference in 45 minutes time which we will livestream when it starts.
With three-quarters of the current £50bn QE programme still to be unleashed, it was not surprising to see no new announcements on QE. Bank rate was kept on hold again, consistent with the Bank's guidance.
We still expect a £25bn QE extension in November and no cut to Bank rate. We think the latter would be especially counterproductive, but we note the increased probability that it happens regardless.
He also discusses the Bank's recent initiatives to kickstart bank lending to businesses and households.
The success or otherwise of the Bank's recently launched Funding for Lending Scheme (FLS) and Extended Collateral Term Repo (ECTR) is too early to conclude, let alone act upon. Minimal interest in the ECTR provided an inauspicious start, but we believe banks will face political pressure to tap the FLS, increasing its take-up. That said, we doubt it will be as successful as the Bank hopes (see FLS: another scheme, but once bitten, twice shy). Take-up of these schemes has an added importance in that they have the potential to tie a significant portion of funding to Bank rate. Part of the argument against cutting Bank rate has been its ineffectiveness owing to it lowering bank lending rates contractually tied to Bank rate but not funding costs.
The associated squeeze on margins would be counterproductive to the point that quoted rates may actually be pushed higher instead as banks seek to cross-subsidise existing loans. Large take-up of these schemes would damp this danger, but QE actually acts in the opposite direction. All reserves at the Bank are remunerated at Bank rate and the volume here is more than twice the funding that may occur through the FLS and ECTR. QE3 alone may sterilise the support for a rate cut that comes from these new facilities. Moreover, because these schemes are temporary, funding tied to Bank rate will evaporate on their expiry, which would complicate the Bank's exit strategy and make the impact of a rate cut unambiguously negative, in our view. So almost needless to say, we are not in favour of a rate cut. But that does not mean the MPC will not be encouraged by the building consensus and follow through regardless.
David Kern, chief economist at the British Chambers of Commerce, said:
The MPC’s decision to maintain QE at £375bn, and hold interest rates at 0.5% is no surprise. Following last month’s move to raise QE from £325bn to £375bn, the MPC is unlikely to make further policy changes until it implements the increased asset purchases. While demands for more QE may increase if weak growth continues, we believe more QE would be a risky and unwise move. Since QE offers marginal benefits to the real economy, it should not be used to prevent inflation from falling below 2% in 2013. A temporary fall in inflation below the target would be positive since it would underpin real incomes and support demand, at a time when the fiscal plan and eurozone problems continue to dampen UK growth prospects. To support growth, and help overcome the obstacles to a revival in business lending, the MPC and the government should rely more on tools other than QE. If the MPC agrees to purchase assets other than gilts, notably securitised SME loans, banks would be less risk averse in lending to businesses. In addition, the MPC could also consider introducing a reduction in the rate paid by the Bank of England on deposits held by commercial banks. This could discourage hoarding and may provide a useful incentive to increase lending. The creation of a business bank would also provide new and growing companies with the credit they need to start-up and expand.
Lee Hopley, chief economist at the EEF manufacturers’ organisation, said:
With the MPC upping their asset purchases at the last meeting, another move wasn’t likely to be on the cards this month. However, concerns about the economy haven’t eased up over the past months and there are now question marks over whether we will see a bounce back in the near future. This could produce a further bias towards monetary loosening later in the year.
Alan Clarke at Scotia Bank - who is at the Olympic dressage - found time to send us this note. He talks of a "missed opportunity".
The August Bank of England MPC decision resulted in no change in either the scale of asset purchases or Bank Rate. That was in line with consensus expectations, though contrary to our view that this would be a great opportunity for the Bank to get ahead of the curve and expand its asset purchases.
The consensus expectation was that QE will be expanded in November. Ours was – why wait? Why wait when next week’s Inflation Report projections are likely to provide a compelling case for further policy ease? We expect next week's Inflation Report to show a slashing in the Bank's projections, with a GDP growth projection for 2012 close to zero and a 2-year ahead inflation projection around 1% y/y.
We suspect that the committee was loathe to respond to an early estimate of GDP that was heavily affected by the weather and a lost working day - none of which monetary policy can do anything about.
Here is some instant reaction to the Bank of England's no change decision from Chris Williamson, chief economist at Markit. He says we will know more about the Bank's views on the economy and its outlook next Wednesday with the publication of its quarterly inflation report.
The Bank of England joined ranks with the US Federal Reserve in keeping monetary policy unchanged in July but, like the Fed, the Bank is likely to be watching the data flow especially closely over the next couple of months to see if further stimulus is needed. Having voted to add a further £50 billion to its quantitative easing programme at its July meeting, it was no surprise that the Bank of England's Monetary Policy Committee decided to leave policy unchanged at its August meeting, especially as the Bank is also keen to gauge the impact of the newly-launched "Funding for Lending" scheme. However, the economic data must surely be an increasing cause of angst among policymakers. News from the PMI survey that manufacturing activity slumped lower in July following the shock 0.7% drop in gross domestic product in the second quarter adds to the risk that the economy will have remained mired in double-dip recession in the third quarter. Hopes are clearly pinned on the economy bouncing back from the second-quarter weakness caused by wet weather and the extra bank holiday in June, but the disappointing PMI data and growing doubts that the Olympics will bring a growth spurt to London suggest that such hopes may prove over-optimistic.
On the inflation report:
There is a somewhat depressing inevitability that the Bank will have to revise its growth predictions down again in the light of the new data, raising the possibility of further action at the September meeting if the data continue to deteriorate in the next few weeks. The Inflation Report will also no doubt continue to highlight the fact that one of the main causes of the disappointing UK economic performance this year has been the euro area's ongoing crisis.
Dutch finance minister opposes ESM banking licence
Over to the Netherlands, where the Dutch finance minister Jan Kees de Jager has said he is against providing the European bailout fund with a banking licence.
A banking licence would allow the ESM to borrow from the European Central Bank, easing concerns that its €500bn (£390bn) pot of cash would not be enough if Spain or Italy needed a bailout. But Kees de Jager says it would increase the risk of moral hazard.
Yannis Koutsomitis notes that Kees de Jager will be keen to be seen as taking a hard-line as elections loom in a country, where voters feel they are subsidising their weaker eurozone counterparts.
Pre-election period RT @forexlive Dutch FinMin De Jager: Against banking license for rescue fund bit.ly/Qyly1V
The European Commission has welcomed the commitment of the Greek government to structural reform. In a statement this morning, the EC said:
The ten priorities for structural reform announced today by the Minister of Development are a clear sign of the commitment of the Greek government to bring about the much-needed reform of the Greek economy. This is welcome.
The Commission continues by urging Greece to press on with reforms, with a promise that sounds rather like a threat the task force will help, if necessary.
The pursuit of these priorities will make an important contribution to the broader reforms to which Greece is committed within the [memorandum of understanding] and which are needed to boost growth and employment. We now expect determined implementation of all of Greece's reform commitments in full respect of Union law, and in particular Single Market rules. Where relevant, the Commission Task Force will provide assistance.
For a bit of light relief, Bild has said it wants back a Prussian spiked helmet from 1871 that the German daily presented to Draghi earlier this year, if the ECB president "goes soft" on crisis-hit nations.
Bild said the spiked helmet was supposed to remind Draghi of strict Prussian discipline against inflation.
Above a delightful picture of Draghi laughing as he accepted the remarkable hat, runs the headline:
No more German money for bankrupt states, Herr Draghi!
Spiro goes on to say even if the ECB does come through, Spain is doomed.
We believe it would be a mistake to rely on the ECB's intervention alone to turn sentiment around. Spain is likely to remain trapped in a pernicious circle in which the deterioration in its public finances, the weakness of its banks and the severity of the recession will continue to feed on each other.
We've got some analyst reaction on Spain's bond auction earlier today. General feeling is of relief it sold the bonds, but concern over the interest rates investors charged. Nicholas Spiro of Spiro Sovereign Strategy writes:
Size-wise, today's auction had a lot going for it. The amount on offerwas fairly modest which helped support demand. But timing-wise the sale was hardly opportune given concerns that the ECB's policy announcements later today will be fairly limited in scope. These fears showed up in the yields which are even more elevated than those at a similar sale last month. Once again, the Treasury managed to get its debt out the door only by paying punitive rates.
He says this is the most critical week for Spanish debt since Spain became the focal point for investor anxiety about the eurozone.
If the ECB's policy announcements later today prove to be a disappointment - which we believe is likely to be the case - Spanish and Italian bonds are likely to come under renewed selling pressure. As far as the markets are concerned, the ECB is the only institution that can credibly counter a collective loss of confidence in Spain and Italy. Market participants are effectively relying on the ECB to hold the fort - even more so after the Fed sat on its hands yesterday.
Over to Greece, where our correspondent Helena Smith says finance minister Yiannis Stounaras is set to meet officials representing the debt-stricken country’s troik” of creditors – the EU, ECB and IMF. Helena writes:
The Greek finance minister Yiannis Stournaras will meet troika officials today, in a final bid to line up €11.5bn in savage spending cuts, the condition of further rescue funds.
Although the visiting troika officials have been in Athens for the best part of two weeks, negotiations over the savings have made little progress with Athens’ three coalition leaders only finally agreeing on the parameters of the austerity package during fraught talks last night.
After days of digging in their heels at the prospect of further wage and pension cuts, the coalition’s two left-wing junior partners finally bowed to pressure from Conservative prime minister Antonis Samaras and conceded to the cuts.
The socialist Pasok party leader Evangelos Venizelos had been especially adamant that the package be split in two, voicing fears that implementation of all the measures would have a disastrous effect on an economy reeling from five straight years of recession.
Samaras insisted it was imperative that after months of delays prompted by two successive elections, Greece regain international credibility first, before attempting to renegotiate the controversial loan agreement it signed up to with foreign lenders in March. The leader said conservations he had had with the European Commission president, Jose Manuel Barroso and European Council president Herbert Van Rompuy, had left him “in no doubt” that Greece had to act decisively to ensure its position in the euro zone.
Lenders have increasingly expressed exasperation with the slow pace of reforms – but the pressure to accept yet more cuts has clearly struck a blow to the unity of the fragile coalition.
“Now the hard work begins,” said an official. “The savings will inevitably be harsh. There is no other way.”
The Greek finance minister said the measures would be announced “towards the end of August” – much later than initially thought.
Prices charged by factories in the eurozone fell more than expected in June as energy prices continued to drop, paving the way for the ECB to cut rates again later this year.
Eurostat said producer prices slid 0.5% for the second month running, while economists were forecasting a 0.4% fall.
Spain has sold €3.13bn of two, four and 10-year government bonds but had to pay up to get the bonds away.
The average yield at the sale of €1bn of 10-year bonds rose to 6.65% from 6.43% at the previous auction in July. Demand was weaker, with investors bidding for 2.4 times the amount of bonds on offer, compared with 3.2 times last month.
Elisabeth Afseth at Investec said the interest Spain had to pay on the debt is unsustainable.
Those aren't levels they will feel comfortable funding at for any length of time. But getting anything done at the moment is maybe an achievement and they are helped by the ECB later today and expectations that they wil do something. The yield level certainly keeps the pressure on for [the ECB to resume bond-buying].
The head of research at spread-better Accendo Markets says the auction was so-so.
#Spain sells more 2-10yr debt than planned, but pays higher yields. Demand satisfactory. #Madrid still needs help to Drag(hi) down yields
More surprising economic data out of the UK, with today's PMI showing UK construction activity returned to marginal growth in July. Builders said they were more positive about the next year despite a fall in orders.
The Markit/CIPS construction PMI recovered to 50.9 from 48.2 in June. That compares with economist expectations of another fall to 48. Any figure above 50 signifies the sector is growing.
Markit economist Tim Moore stressed that this survey showed weak growth from a very low base.
July’s survey offered little sign of an imminent rebound in the UK construction sector, with total activity rising only marginally after well documented temporary factors had weighed on output last month.
Another drop in new orders, alongside wet weather conditions, meant a soft platform from which construction output could bounce in July. The pace of new order decline was one of the fastest seen in the past three years, and consequently there was just a meagre post-Jubilee expansion of activity levels.
Spanish unemployment fell by 0.6% in July but, before we crack out the cava, that's not as much as it should be in the busy tourist season.
The jobless rate usually falls in the summer, as hotels and tourist resorts hire seasonal workers. This July, the total number of jobless fell by 27,814 people, compared with 42,059 last year and Spain still has 4.6m people out of work.
Tomas Burgos, secretary of state for social security, said:
Work created during the summer season has not sufficiently compensated for the loss of jobs in other sectors.
But other market watchers seem relatively confident. Gavan Nolan of financial information company Markit says the price of Spanish credit default swaps – effectively the cost of insuring against a Spanish default – has come down this morning.
Spain CDS 2bps tighter at 536bps pre-Bono auction. Short covering ahead of the ECB and small size should see a smooth sale
Markets are jittery ahead of the ECB decision, with bond investors reportedly concerned that Draghi will disappoint. Reuters reports:
Spain faces yet steeper borrowing costs at a bond auction on Thursday as investors worry that the European Central Bank might disappoint their high hopes of help for struggling euro zone economies later in the day.
Spanish bond yields, which had hit euro-era highs due to the possibility that Madrid will have to be bailed out, fell last week after President Mario Draghi said the ECB would do whatever it takes to save the common currency, within its mandate.
But yields are now expected to rise at the auction from previous sales, as concerns grow that the ECB will fail to meet the market's expectations when Draghi announces decisions of the Governing Council's monthly meeting a few hours later.
As to the Bank of England, while the committee will have plenty to discuss, economists are not expecting any announcements out of the meeting. David Tinsley of BNP Paribas notes that the minutes from the last meeting have limited what the bank can do this time around.
They could debate whether cutting bank rate this month might be a useful step to take. However on that they have made life difficult for themselves by remarking in the July minutes that it would take 'several' months before they would be in a position to assess whether Funding for Lending had made the argument for a Bank Rate cut stronger. This makes it hard for them to cut this month without looking like flip-floppers.
So to sum up, we do not expect the MPC to expand their monetary stimulus at the August meeting. But this meeting is not a 'boring' one and there is an active debate that the MPC need to have on whether still more stimulus could and should be announced ahead of November.
Stephen Lewis of Monument Securities agrees and suggests the bank will also wait and see on quantitative easing:
It seems that the very earliest we should expect the MPC to reconsider the level of bank rate is November. Similarly, with respect to the Bank’s Asset Purchase Facility [quantitative easing], it would be unusual for the MPC to take a decision to lift the ceiling more than a month before a current buying programme was due to end. The present purchasing schedule extends to November. It seems, then, that the MPC will most likely keep policy unchanged.
Looking ahead to the ECB press conference, commentators are mixed on what will emerge. Today's Guardian editorial is suitably downbeat:
Whatever Mario Draghi announces at lunchtime on Thursday will be a disappointment.
How could it be otherwise? The expectations that have been heaped on the head of the European Central Bank are so outsize that it is impossible for any official, however ingenious or heroic, to meet them. Yet still economists ask whether the ECB will "save the day", while blogs pant over a "game-changing solution" to the euro crisis.
Gary Jenkins of Swordfish Research expects an announcement that the central bank and bailout funds will intervene in the bond markets.
It is clear that some kind of combination of ECB and EFSF/ESM buying of bonds is on the cards.
There has been talk of another LTRO which considering that every politician in Europe seems to think that they must break the link between sovereigns and banks seems utter madness. If they actually want the money from such a strategy to flow into the real economy then maybe they should consider a 10-year LTRO?
There have also been hints that the size of the rescue funds could be increased by granting the ESM a banking licence. Mr Monti yesterday said that “I think that this in due course will occur.” However the message from Germany was an unequivocal “No” to such an idea with the German economy minister saying that “The Chancellor and I have discussed it and we are united that a bank licence cannot be our way.”
The ITV news business editor warns against hoping for too much.
Don't count on ECB taking big steps - Draghi did say he'd do 'whatever it takes' , but also said, 'within our remit' - and remit is limited
There were positive noises out of China as well, which may or may not make an announcement at 12pm today.
A report out last night in a publication operated by the central bank, the People's Bank of China, said monetary policy will be pre-emptive, and policy should be forward-looking.
The paper said the policy focus should be on managing reserve requirement ratios (RRR) to ensure stable growth in money supply.
The reserve requirement ratio determines the level of reserves a bank must hold in cash or deposits. By cutting them, the central bank effectively allows the release of more money into the system.
Significantly, the editorial did not explicitly mention further interest rate cuts. Economists had been forecasting a 1% cut in the RRR, and a 0.25% cut in interest rates by the end of the year.
The People's Bank of China may adopt measures to release more money into the system. Photograph: ChinaFotoPress/Getty Images
Last night, the US Federal Reserve refrained from announcing additional stimulus, but a tweak to the statement suggested it could be more inclined to do more QE in the future. The statement read:
The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed.
That compares to June's statement, which said:
The Committee is prepared to take further action as appropriate.
Not wildly different, but markets will cling to anything they get.
The markets are hoping the ECB will live up to hints dropped over the past few weeks and announce its intention to start buying up Spanish and Italian bonds, in a bid to keep their borrowing costs down.
There has also been talk of another round of the long-term refinancing operation (LTRO) – a flood of cheap money into the market – and hints the ECB could grant the bailout funds a banking licence to give them more firepower. While markets are ever-hopeful, Super Mario has a history of disappointing. We shall see.
Economists are mixed on what the Bank of England might do. There were murmurs that PMI data out yesterday – which showed the manufacturing sector was in a far worse state than feared – could prompt the bank to announce an extension to the quantitative easing programme or even a rate cut.
Others say it is unlikely to announce anything until the impact of recent measures, such as the Funding for Lending programme, has become clear.
Today it's all about the central bank decisions, with both the European Central Bank and Bank of England announcing the results of their monthly meetings.
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