The European Central Bank—as well as the Bank of England—is scheduled to render a monetary policy decision next week, and investors are already speculating about major moves that could come not only from the ECB but from central banks around the world.Numerous economic indicators are now pointing to a rate cut from the European Central Bank, and seven out of eight analysts consulted by Business Insider saw a high likelihood that the bank would cut its target rate to 0.75 per cent. Some are even beginning to dream bigger, talking about the likelihood of another round of coordinated central bank intervention from major central banks around the world.
Recent measurements for both inflation and the M3 measure of money supply—arguably the two most important economic data points that the ECB follows—showed slowing economic growth and business activity.
Further, it would be hard to deny that global growth is slowing, with disappointing PMI numbers showing the pace of economic activity declining around the world.
In a recent report, Morgan Stanley economists projected a 25 bp cut in June and a second, 25 or 50 bp cut in July, amid increasing likelihood that the Bank of Japan, the Federal Reserve, and the Bank of England will embark on new easing programs in the short term.
Lombard Street Research’s Jamie Dannhauser synopsized the impetus for a rate cut in a note out yesterday:
The availability of bank loans has fallen further in the current quarter. Conditions in bank funding markets have deteriorated markedly since the end of March – there has been very little issuance of medium-term bank debt since then. Capital flight from Greece seems to be intensifying. And a slew of data in recent weeks suggests the eurozone economy is contracting once again.
Even so, our sources agreed that such a rate cut would be a far more symbolic move than it would an effective one. “Banks rely heavily on the ECB,” TF Markets Advisors founder Peter Tchir said in a phone interview. “I think it would be a symbolic effort that [the bank] would be there to support them.”Indeed, “action before the Greek elections [on June 17] and the [June] EU summit would show independence, like cuts on [Draghi’s] arrival,” said Accendo Markets’ Head of Research Mike van Dulken. “Act after and some might be consider him forced into it.”
Non-standard measures like new rounds of sovereign bond purchases by the ECB or even the European Financial Stability Facility (the temporary European bailout fund currently in place) might also be in the works, though the timing of such measures—before or after the Greek elections—remains up in the air. Tchir opined that more easing measures “wouldn’t look panicky” if they were timed with the regular meeting.
But even more interesting is the prospect of coordinated central bank action.
“I think we’re teetering on the edge of a precipice,” Tchir confided, comparing the current situation to the escalation of investor fear last fall. “I think were’ at that stage where we see some kind of coordinated action where the ECB does something, followed by the Fed.”
A majority of our sources also opined that coordinated central bank action could be in the cards soon, particularly if global credit conditions start to tighten again. Central banks outside the ECB “would be doing things for their own self interest, just at the same time,” Lombard Street Research’s Dario Perkins told us “Still, even if it merely looked like co-ordination, that would still send a more powerful signal.”
Morgan Stanley analysts predicted that central banks will begin to act in just that fashion, where easing might entail implicit rather than explicit coordination from central banks. “In the next couple of months, it looks increasingly likely that both EM and DM central banks will deliver [another] dose” of monetary easing.
Admittedly, such a “liquidity fix” might appears clear that simply pumping more liquidity into the markets will give investors only a temporary reprieve—or halt some negative momentum.
“I think we either get [an ECB] rate cut or we get a severe sell-off in the markets,” Tchir predicted.
While we haven’t seen most investment banks make their official calls on the outcome of the ECB’s next decision, these opinions nonetheless indicate that a growing number investors are expecting big moves from the bank—and central banks in general—as soon as June 6.
NOW READ: This Is What Happens If Greece Exits The Euro >