This week sees both the European and US central banks make monetary policy announcements.
A statement by the European Central Bank president Mario Draghi “within our mandate, the ECB is ready to do whatever it takes to preserve the euro and believe me, it will be enough” indicates that the ECB may be close to adopting a policy similar to that of the US of buying government bonds to reduce interest rates.
The problem in Spain is that with current rates of around 6.7% (down from early 7’s prior to his statement) it is extremely difficult for them to service their debts and will likely need to leave the Euro. The markets eagerly await the ECB statement (Thursday European time) to see if Draghi backs his words with actions. Share markets have performed strongly since Draghi’s statement as if implementing this policy would help reduce some of the downside risks associated with a Euro break up. However, any disappointment could see markets quickly give up these gains. A crucial problem for the ECB is its mandate and some people question their ability to adopt the necessary policy without the approval of European governments and in particular Germany which has not been and easy feat to date.
In the US the Federal Reserve will announce its policy Thursday morning NZ time and markets hope (maybe less than anticipate) that they will deliver further stimulus to help support growth and employment. A major move by the Fed is less certain however any lack of action is likely to see markets fall. Additionally, while moves by policy makers to help improve liquidity and markets in the short-term time will tell if they are successful in helping restart growth – results to date are not that encouraging.