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Afternoon analysis 13.10.2014

13 Oct 2014 18:10|Artur Wiszniewski

ECB may be forced to resort to full QE, says the Bloomberg survey. Finland was stripped of a 'triple A'. The zloty still without a clear direction.

The European Central Bank may be forced to use full quantitative easing as the goal to expand its balance sheet by 1 trillion euro fades – according to 60 percent of analysts surveyed by Bloomberg. Market participants were also disappointed due to the ECB's reluctance to state the upper level of assets purchases.

Although the ECB didn't provide details on its planned scale of assets purchases, president Mario Draghi said that it is going to expand its balance sheet to 2012 levels. Since the first half of 2012 ECB's balance sheet has been falling form around 3.1 trillion euro to its current level of 2.1 trillion euro currently.

The ECB purchases will grow the central bank's balance sheet by 600 billion euro according to Bloomberg survey. This amount is comprised by 150 trillion this year, 250 trillion the next year and another 200 in 2016. So there is a discrepancy between Draghi's verbal goal and analysts' estimates.

Given this circumstances, there are rising speculations about the ECB being forced to move to full quantitative easing to reach its goals. However, purchases of government bonds are very distant due to the defiance of Bundesbank and its alliance. The German central bank and the National Bank of Austria opposed recent actions undertaken by the ECB. Odds for easing their stance are very little.

The inflation growth stood at 0.3 percent in September according to Bloomberg survey. So it means that the price growth moved away from the ECB's goal of close but below 2 percent. The inflation rate has remained below the ECB's goal since the beginning of 2013. In addition, the rest of the data is also poor – the unemployment rate is still near record high and the PMI reports signaled further deterioration of economic conditions. That has increased the pressure on the ECB.

The German economy disappoints. After GPD drop in the second quarter the poor industrial data and weak PMI reports bolstered the speculations that the major euro zone economy may slip into recession in the third quarter of the year. Some commentators see in this a chance for softening the stance of the Bundesbank.

Finland leaves the elite

The Standard & Poor's agency cut Finland's rating to AA+ from AAA. The decision was motivated by the fact, that the country faces a stagnation and aging society, that may impede its ability to revamp public finance. As a result, Germany and Luxembourg are left as only countries with “triple A” rating in the S&P.

Since the middle of 2012 the GDP of Finland is in stagnation. The government predicts that in 2014 the economy will fail to growth. In addition, since the beginning of the crisis the debt to GDP ration in Finland rose from below 30 percent in 2008 to current 58.6 percent in the beginning of the year. The ration is going to surpass the EU limit of 60 percent in 2015.

The Finland case shows that any country – even seen as prudent in public finance – cannot withstand a long period of no growth, and eventually it will bend under the weigh of overgrown social security system. So it is very important to focus on growth restoring policies in the euro zone.

The zloty without direction

Monday was filled by speeches of the Monetary Policy Council. But a clear message hasn't been given.

Dovish Andrzej Bratkowski said that he sees additional cut by as much as 75 basis points. Conversely, hawkish Jan Winiecki and Adam Głapińsk don't see any room for additional cuts. Moreover, the NBP president Marek Belka said that probably there will be one more cut by 25 basis points – what is consistent with market expectations.

The zloty started the week lower against the euro and with some gains against the dollar. The Polish currency moves in narrow range against its major pairs, despite the uncertainty sparked by the MPC. In addition, the zloty coped with heightened risk aversion and it exploited the euro rise.

13 Oct 2014 18:10|Artur Wiszniewski

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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13 Oct 2014 12:38

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