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It's that time of the month when the Bank of England and the European Central Bank announce their interest rate decisions. To no great surprise, on Thursday, the BofE left things exactly where they were, 0.5% and the bond purchase program remaining at £375bn. Shortly after the BofE was the main event of the day, the ECB rate decision. Recent data has shown Italy is once again becoming Europe's problem child as the economy continues to struggle for growth. Italian and Spanish bond yields having fallen sharply over the past couple of years but are starting to rise again as concerns reappear that Italy's government debt, in particular, will become more burdensome on the back of the weak economy. At present the rise is minimal, but we have always maintained that one thing that will spur the ECB into greater action is any signs that peripheral yields are starting to rise again. The recent events in Portugal will also have added to investor sovereign concerns.
The ECB like the Bank of England left headline rates where they were. What, as always, is more revealing are the comments in the following press conference, as every month Mario Draghi prepares himself for the same onslaught of questions about these additional measures he so often refers to.
This time he did seem to throw the wolves a little bone as he announced the ECB are looking into buying Asset Backed Securities (ABS), the bulk of which are home loans. This again should free capital from banks balance sheets introducing more liquidity into the market place. Buying asset backed securities is, by his acknowledgement, a form of QE but probably less politically controversial than going into buy a particular country or countries debt, but it may well eventually come to that (our words). The other area of questioning centred around the heightened geopolitical risks, in his opinion so far the impact had been minimal. The euro had little reaction to the press conference but has continued to drift lower over the past weeks now trading below $1.34.
For now it continues to look like rates are going to remain where they are across the globe for a while yet, despite economist’s continued speculation. This will continue to offer support to equity investors, but it would be nice to feel that central bankers will one day feel confident enough in the economic recovery to raise interest rates. That would be the ultimate vindication of their policy measures.