The ECB rate decision

The papers are full of speculation on Thursday morning as to what the ECB might do with interest rates, and the possibility they will abandon the bond sterilisation program. As it turned out the status quo remained, no rate change and Mario Draghi went on to reiterate his "we are ready and prepared to act" platitude at the post announcement press conference.

One alternative suggestion to a change in monetary policy, came from the CIO of Generali Bank in today's FT, that the ECB should buy equities. I would be extraordinarily surprised  if the ECB followed this idea, but to my mind it would make a lot of sense. It is not an original idea, I have written in the past that this was a measure the Fed and the BoE should have looked into, and Jim O'Neil the former chairman of Goldman Sach's asset management has also proposed this idea in the past.

It would not be the first time a monetary authority has bought equities, to reassure markets. In 1998, at the height of the Asian crisis, the Hong Kong Monetary Authority stepped in and bought Asian equities. It had the desired effect of stabilising the market and led to a broad equity market rally. Ultimately, the HKMA also made a great deal of money. I have never understood why it is politically acceptable for central banks to buy debt but not equity. I assume as a debt holder you have no influence in the business, whereas an equity holder, in theory a government, could influence the direction of the company.

There are examples of Governments holding equity stakes, you only have to think of RBS and Lloyds. I can see many hurdles being put up, which equities would they buy? Would they be creating a false market? Are just a couple I can think of from the top of my head. What if the equity market went down and they lost money? is another one.

I am sure the whole idea went through Ben Bernanke's mind in 2009, and I am sure even if he wanted to do it, many political advisors would have warned him away from the idea. To my mind that is why he settled on the policy of quantitative easing. The Fed decided to make money so cheap for others to do it, that the risk would be worthwhile. The trick is now as the cheap money is withdrawn to ensure investors feel comfortable enough in the recovery to not sell out their equity investments.

The question is more “Can the ECB find a politically acceptable way to create the same environment that Ben Bernanke did, for traders to buy European equities on their behalf?”

Posted on February 7, 2014 .