It may be something symbolic such as a small rate cut or possibly a more substantial move such as a new LTRO program (discussed here), but the European Central Bank will be forced to loosen monetary policy in the near future. Here are the reasons…
Loan growth in the US continues to slow. Credit expansion is certainly not nearly as bad as what has transpired in the Eurozone (discussed here), but the slowing trend is unmistakable. The current rate of loan growth is now significantly below the nominal GDP expansion.
In spite of a number of positive economic indicators out of the Eurozone (see example), credit growth remains the area’s Achilles’ heel. The latest private sector loan growth aggregate from the ECB shows an annual decline of 1.8% (adjusted for sales and securitization – see press release). Here is what it looks like for the area’s households and corporations.
Based on the data from the Federal Reserve Bank of St. Louis here is a single chart that shows credit growth in the US is continuing to decline while the Fed’s balance sheet is expanding.SoberLook.com From our sponsor:www.SoberLook.com
In spite of some positive economic signals out of the Eurozone (see Twitter chart), the area continues to struggle with credit growth. The latest loan growth measures still look quite bleak. We may however be seeing the first signs of the bottoming out…
It seems that aside from halting the yuan appreciation (see discussion) Beijing has decided to use fiscal rather than monetary tools to stimulate the economy.
Bloomberg: – Chinese Premier Li Keqiang said the nation will speed railway construction, especially in central and western regions, adding support for an economy that’s set to expand at the slowest pace in 23 years.
The State Council also yesterday approved tax breaks for small companies and reduced fees for exporters as it pledged to keep the yuan’s exchange rate “basically stable at a reasonable and balanced level,” according to a statement after a meeting led by Li. China plans a railway development fund, the government said.
Once again, the rationale to maintain a relatively tight monetary stance is to make sure that the shadow high yield deposit business and property speculation doesn’t grow out of control (see post). Applying the brakes too suddenly however is quite dangerous, particularly for a nation that in recent years has become addicted to credit. The broad measure of credit (sometimes called “social financing”) is now nearly double the GDP.
Tight and uncertain monetary policy could have a severe adverse effect on China’s weakened economy by forcing an uncontrolled unwind of credit. And PBoC’s policy remains both tight and uncertain. The overnight interbank (SHIBOR) rate has risen by 35bp in the past week. Most central banks would spend months fretting over such an adjustment. Other short-term rates have risen even more.
PBoC’s attempt to force an abrupt end to credit addiction could easily offset any economic benefits of speed railway construction or tax breaks. Bursting such a massive credit bubble is a delicate process, which China’s central bank is not executing in a controlled manner.
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Here is a quick followup to an earlier post on pushing the elevator button more than once. It will not make the elevator come any sooner.The Fed’s securities purchases have sharply increased banks’ excess reserves, while credit expansion continues…