As I predicted the Bank of England and the ECB left interest rates unchanged. The Bank of England’s move was expected, what the ECB might do was less certain. Economic opinions ahead of the meeting as to what the ECB might do varied from, no change, to a 15bp point cut to a full 25bp point cut. Yesterday’s intervention by the IMF obviously held no sway with the Governing Council members. The euro rallied back to the top end of its trading range of $1.38, European stocks met the news with indifference.
When questioned about the discussion on any changes to interest rates, Mario Draghi described the debate as broad. When asked about the IMF comment’s he replied, “that their analysis and that of the IMF’s differed”. I wonder if today’s decision has strained relations with the IMF, particularly as the decision to whether Greece requires a third bailout remains in the air.
When commenting about the reasons for the decision today, his answers could have been taken from any of the past few conferences. He believes the recovery is modest but continuing, they do not believe they are in a Japanese scenario. The ECB did raise its estimates for economic growth for the region from 1.1% to 1.2% but lowered its inflation expectations from 1.1% to 1% for 2014. Mr. Draghi reiterated his comments that they stand ready to act if needed; their current expectations are for a long period of low inflation, but not deflation.
I was fairly convinced, that despite the IMF, the ECB would not change interest rates today. As I said ahead of the meeting if they failed to do it in the preceding months, why would they do it today? That does not mean I do not believe they will eventually act. The ECB has generally reacted over the past 4 years when little alternative is left and I imagine this is what they will do again in this case.
In the latest developments in the Ukraine, Crimean’s parliament voted unanimously in favour of entering the Russian Federation. Equity markets took this news along with the news that Obama had placed visa restrictions and economic sanctions on Russians who are deemed to have been involved in military action in Ukraine in their stride.
Investor sentiment seems to remain unsurprisingly cautious, the AAII investor survey that I refer to sometimes, showed an increase in the number of people who thought the stock market would be lower in 6-month’s time than it is today. Day traders remain very short the S&P 500 as they were for a large part of last year, but less bearish of the UK market. Betting against the performance of the US market was not profitable last year that does not seem to have deterred traders having another go this year.