Analysis - European central banks seen little swayed by Fed move

FRANKFURT (Reuters) - Central banks in mainland Europe are unlikely to rush to follow the U.S. Federal Reserve into fresh policy easing although the Fed’s pessimism about the economic recovery may give them pause for thought. The Fed said on Tuesday it would use proceeds from maturing mortgage bonds to buy more government debt in a bid to reinvigorate a weakening economic recovery, a small but significant step towards further stimulus.

The move to what some analysts have dubbed “QE2” widens the gap between the Fed and the European Central Bank, which last week gave an upbeat assessment of the euro zone outlook and said nothing to dislodge expectations it will keep gradually pulling back the liquidity lifeline thrown to banks during the crisis.

“There’s a mismatch. It’s one of those odd situations where the ECB gets more optimistic at a time when the Fed gets more pessimistic,” Barclays Capital economist Julian Callow said.

“For the ECB the glass is half-full while for the Fed, the glass is half-empty.”

Most other European central banks are already on a different track, heading for standard monetary tightening. The Fed’s decision is unlikely to dissuade them from that path although the timing of tightening moves may be pushed back.

Still, the Bank of England is a notable exception from the general European exit bias and its sombre tone on growth in its latest inflation report was similar to the Fed’s.

The BoE’s pessimism fanned analyst expectations that more monetary easing is possible in the UK, although Governor Mervyn King was quick to distance the bank from the U.S. decision.

“I think the policy measures they (the Fed) announced yesterday were ones that were much more designed to maintain the stance of policy to avoid an inadvertent tightening of policy,” he told a news conference. King noted there was “great uncertainty” about the economic outlook for the United States and for the euro zone, although a strong run of euro zone data has prompted economists to revise up expectations for 2010 growth in the latest Reuters poll.


Norway’s central bank, which was the first of the Europeans to tighten policy after the crisis struck, also noted uncertainty about the U.S. outlook, after holding its own rates at 2 percent and affirming a flat outlook, as expected.

Analysts said the prospect of weaker U.S. growth would likely be a concern for other policymakers, although the Fed’s action -- if successful in reviving growth -- might also allow a degree of free-riding.

According to Koon Chow, a strategist at Barclay’s Capital, slower U.S. growth would most affect exporters.

In emerging Europe, Israel and the Czech Republic, both heavily export-dependent, could potentially delay any hikes in the future. “Yesterday’s decision probably means the pace of tightening for a lot of economies gets pushed out,” Chow said.

Swiss interest rate futures rose after the Fed announcement, showing that markets pushed back expectations for a first post-crisis hike to June 2011.

Some analysts had expected the Swiss National Bank to lift its ultra-low 0.25 percent target rate as early as September. The SNB has already unwound unconventional measures such as asset purchases and currency intervention.

“It plays a role in the SNB’s thinking the way the global economy develops. It’s important for Switzerland, given the importance of exports,” said Fabian Heller, economist at Credit Suisse.


But Goldman Sachs economist Dirk Schumacher said weaker growth in the U.S. did not necessarily mean a slowing in the rest of the world, particularly if China’s economy picked up.

“We genuinely believe the U.S. is less important as a global pace-maker than it used to be,” he said.

“The ECB remains in a wait-and-see stance and the Fed is leaning towards more renewed QE and we think that by the end of the year they will do something more meaningful.”

“That is not what we expect for the ECB.”

The ECB has been slowly phasing out extra liquidity and is due to decide in September whether to extend its policy of unlimited lending at operations for up to three months, although no change in key rates is seen until the third quarter of 2011.

Barclays’ Callow said the ECB would probably fret about the Fed’s actions destabilising global inflation expectations by putting downwards pressure on the dollar and upwards pressure on commodity prices.

“It puts the ECB in a difficult position. Higher commodity prices make the Fed if anything more likely to ease, while the ECB is more worried about inflation,” he said.

“That can drive a bit of a wedge between the ECB and the Fed. It’s not straightforward for the ECB to follow the Fed.”

Additional reporting by Marc Jones in Frankfurt, Catherine Bosley in Zurich and Mike Winfrey in Prague; editing by Patrick Graham