Wednesday, August 01, 2012

No big moves expected from Fed, ECB: analysts

SINGAPORE: The US Federal Reserve and the European Central Bank (ECB) are not expected to announce any surprises at their regular policy meetings.
Experts say both central banks will resist any temptation to pump more money into the system to boost their flagging economies.

The US Federal Open Market Committee (FOMC) is expected to make its policy statement early Thursday morning, while the ECB will meet on Thursday.

The US Federal Reserve and ECB may seem to be under some pressure to make a big move after the market has been abuzz with expectations that both policy makers may boost liquidity in their system through quantitative easing, but hopes of more stimulus measures seemed to be fading.

Roy Wellington, vice president, FX strategy, Asia, ABN Ambro Private Banking,s aid: "The Fed has just recently extended their Operation Twist programme to the end of this year in anticipation that economic data will remain weak in the coming months, so it is quite unlikely that the Fed will do a full-blown QE III (third round of quantitative easing)."

"Operation Twist" is a program conducted by the US Federal Reserve in late 2011 to help stimulate the economy through the buying longer-term Treasuries and simultaneously selling some of the shorter-dated issues it already held.

In Europe, analysts say it is unlikely that the ECB will introduce another round of Long-term refinancing operations (LTROs).

LTROs involve the central bank lending money at a very low interest rate to euro zone banks, which has led to the term "free money".

However, the funds made available in the two three-year LTROs have not been fully deployed.
Also, the extent to which LTROs have been used has strengthened the dangerous link between the ECB and banks.

David Carbon, MD, economic and currency research, DBS Bank, said: "For the ECB, we're probably looking at another small rate cut. We're probably not looking for big events yet."
Instead, some economists expect the US Federal Reserve to maintain its benchmark interest rate near zero from late-2014 until to mid-2015.

Still, experts expect more easing measures from both central banks come September.

Investors are hoping that the Fed will announce another round of bond purchases then. When the US Fed purchase bonds from the market, it is releasing more liquidity in the system, which helps to ease the tight credit situation in the economy.

Timothy Condon, chief asia economist, ING Bank, said: "Investors all over would have to welcome higher nominal GDP growth that would make it easier for the countries experiencing debt problems to grow out of those debt problems. All risk assets would rally, including those in Asian markets."

With more liquidity in the system this may spur a stock market rally and boost asset prices even in Asia, and experts say such "hot" money will not stoke inflation in the region.

Carbon said: "People don't rush so much to put their money to work in a place like Asia. They are more risk averse right now. Big moves by the Fed and ECB don't necessarily and probably would not translate into fast capital inflow into Asia."

Economists do expect Asian currencies to continue rallying against the US dollar and euro but warned that profit taking of Asian currencies may take place if the euro zone crisis widens.

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