Between the Lines

The current economic situation, according to the Bundesbank…german-flag

By now we’re all familiar with the ‘T’ word – “tapering”. Will the USA Fed taper, won’t they, by how much, how will the equities markets react, will the earth stop rotating..? But how many market analysts and investors turn their attention to former central now more national banks such as the Bundesbank when it comes to economic policy? How many follow their domestic ‘guidance’ notes and debate how it could impact “the markets”, not just in Europe but globally? Market commentators’ and journalists’ antennae are permanently fixed to the Fed’s frequency, desperately searching for clues as to when the ‘T day’ will come, but quietly and efficiently there are other central/national banks whose narrative needs to analysed just as carefully…

The Bundesbank published its latest monthly report on Monday and despite not ranking as a high impact news event, amongst many investment circles it caused a bit of a stir. Why did it cause many analysts to sit up and take notice? The mention of interest rate rises.

This is the subject of much debate and conjecture in Germany, a country that has had one of the highest savings rates in Europe where saving is so engrained in the German psyche it’s considered a national responsibility. Now whilst the Bundesbank can’t set interest rates for Germany, the rate is set by the ECB for all seventeen users of the Eurozone’s shared euro currency, they can exert pressure on the ECB were decision making is concerned and given that without Germany the Eurozone would not have exited recession when the latest GDP figures were published last week, the Bundesbank knows that its opinion and lobbying carries incredible weight.


Bundesbank says ECB guidance doesn’t rule out a rate increase, which is possible if inflation pressure emerges, and $EURUSD rises

The mention of rate rises is a ‘no go’ amongst those central banks wedded to ZIRP (zero interest rate policies) and asset purchase schemes, yet here we have a banking behemoth apparently breaking ranks and suggesting that the ECB could in fact raise the base rates sooner rather than later if the conditions are appropriate. You could almost hear the Fed officials choking on their bacon toasties as they began to plan their narrative for the Jackson Hole Symposium beginning Thursday this week and ending on Saturday.

As the Americans may say the Bundesbank has “delivered a curve ball” with their report and despite reports to the opposite (in the USA dominated financial press) the ECB and the various supporting central banks have managed their crisis well.

Arguably the ECB and the Eurogroup have managed and controlled their crisis far better than their USA counterparts. The ECB, unlike the USA Fed, haven’t surrendered control by delivering $85 billion per month of asset purchases from banks in order to keep them solvent and supposedly lending to re-ignite an economy that still remains in the doldrums despite the financial largesse. Quietly and in the background the ECB and Eurogroup have put out each domestic fire as it’s arrived; the subjects of Greece, Cyprus, Ireland have disappeared from the mainstream media’s commentary over recent months as the European apparatus tended to each crisis using just enough fire power in order to gain control.

Is the Bundesbank right in its prediction and protestation that base rates could rise, or are they being premature? The likelihood is that they’re being premature, however, in issuing their guidance they’re marking ground that interest rates are not a one way bet to oblivion and for opening the discussion up they should be praised.

At some stage rates will rise, if not the economies wedded to ZIRP are guaranteeing Japanese style lost decades of zero growth, a situation that can only be avoided by defying the Fed’s assumptions and convention.

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