Canada has always prided itself on taking a contrarian view to the United States. And on Thursday that was demonstrated outside of their backyard as newly-appointed Bank of England Governor Mark Carney joined forces with the European Central Bank’s chief Mario Draghi in effectively stamping out notions of an early return to higher credit costs.
The two central bankers, one from Canada and the latter from Italy, are rowing the opposite way of the Federal Reserve of the United States, which last month more than mooted the idea of dropping its low-rate scheme called Quantitative Easing.
Some commentators have been critical of Carney’s entre. Marc Ostwald at Monument Securities in London wrote yesterday: “Oh so very predictable, a brilliant first service from Mr Carney – and it really does tell us he is all about reform, and not (necessarily) about being radical with policy… It’s not actually very exciting, even if am sure the printed press will opt for some hyperbole tomorrow.”
Meanwhile, his colleague Stephen Lewis, Monument’s chief economist, reminded us all that Draghi might want to take praise for his version of European “QE” which had “not cost a single euro” but had the desired effect of also suppressing peripheral eurozone bond yields. Lewis went on to tell us how that was empty as Portuguese government resignation threats this week drove OT yields up 100 basis points in a week and 200 bps in 2013.
But the real question to be asked is, how effective can BoE and ECB efforts be in a global economy? If it really is true that depressed economies cannot enjoy lower oil prices because BRIC nations are consuming in copious quantities, what makes anyone so sure that European interest rates can withstand a US interest rate rise?
The phrase “when the United States sneezes the world catches a cold” rings so true. Friday’s non-farm payrolls data at 1230 GMT may well confirm that the United States economy is now powering ahead. If it is, the likelihood of higher US rates, and global rates for that matter, becomes more convincing.