One of the most notable things in markets in the past couple of weeks was the reaction to the European Central Bank’s (ECB) quantitative easing plans.
Or lack of plans, to be more accurate.
The ECB’s bond-buying programme is woollier than an alpaca with a blow dry and has come as a major disappointment to markets demanding to know considerably greater detail than the ECB’s mere good intentions.
Thus far this is a case of handbags at 10 paces. My worry is what happens if the market calls the ECB’s bluff. Its president, Mario Draghi, has spoken a good game throughout the eurozone crisis, but he has relied more on threats and promises than on actual action.
The markets are starting to see whether he has teeth, as well as a scary bark.
Will the Germans approve the ECB’s buying of Greek bank bonds? Will the Italians agree to the ECB buying Allianz’s bonds? It is a frightful mess.
In the UK, the Bank of England’s Monetary Policy Committee (MPC) recently had two members vote for a rise in interest rates, and there is a strong likelihood that more would do likewise were the eurozone not giving such cause for concern.
Bank of England governor Mark Carney has come out of the closet in his desire to raise interest rates as soon as possible, which to me is just highlighting quite how little progress the economy has actually made.
The recent brouhaha about the Office for National Statistics’ revisions to GDP for the past couple of decades misses so many points.
The most obvious is that so little reliance should be put on economic data – these are revised for years afterwards, to the extent that it is frequently unclear whether the economy is actually growing or shrinking at any given moment.
The second is that, yes, the economy appears to be growing quite well at the moment, but this is, yet again, debt funded.
In spite of alleged austerity, the public finances are simply ghastly.
And with wage growth even lower than almost non-existent inflation, how are we paying for the monthly rises in retail sales other than on credit?
House price affordability may be in line with long-term averages (according to Nationwide), but this is only because of generationally low mortgage rates.
Which is the greater gamble? Risking wage pressures feeding through to inflation, or raising the cost of borrowing for a country that already cannot afford its debts?
According to a recent Sunday Times article, the shadow MPC (and long may it remain in the shadows) has just voted 6-3 in favour of raising interest rates immediately.
My guess is that none of the shadow wise men and women have to worry too much about their mortgage, nor the interest on their Marks & Spencer storecard.
Jim Wood-Smith is head of research at Hawksmoor Investment Management
