From the FT: Borrowing costs for the eurozone’s crisis-hit countries are tumbling amid expectations that the European Central Bank will be forced to start buying government bonds to fend off the spectre of a Japanese-style bout of deflation. Fears that the eurozone is drifting towards deflation received a fresh jolt on Friday after prices fell in Spain and inflation edged down in Germany. The unexpected dip in prices in Spain and an inflation rate of just 0.9 per cent in the eurozone’s largest economy capped a week that has seen yields on peripheral debt tumble and the euro edge lower on the back of a dramatic shift in stance from the head of Germany’s powerful central bank and dovish comments from other policy makers. Yields on Portuguese, Spanish and Italian bonds have fallen to multiyear lows on the first signs from Jens Weidmann, the president of the Bundesbank and the ECB governing council’s arch hawk, that he could support government bond-buying by the central bank – under certain conditions – should the bloc’s fledgling recovery falter. Though, seasoned ECB-watchers do not expect the governing council to unveil a fresh bond-buying programme as early as next week, Mr Weidmann’s comments, which were coupled with more dovish remarks from other council members, have raised expectations of action in the months ahead. “Investors are already pricing in an increasing likelihood of quantitative easing,” said Richard McGuire, head of rates strategy at Rabobank. “To date, in this game of monetary poker, the ECB has tried to persuade the market that they’ve got a royal flush but without actually showing their hand – but their bluff will be called and they will have to go down the unconventional monetary path.”
Posted on: Fri, 28 Mar 2014 18:11:21 +0000
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