Stimulate and then ... wait ...

Monetary conditions around the world are hugely stimulatory and together with the announcements from the ECB and the Fed, have effectively put a short term floor around market disquiet as money watchers look for the signs of economic growth slowly rising from what is a big stimulus program world wide. Let's quickly summarise:- 

Australia - Interest rates were cut on 2 October 2012 to 3.25% with the RBA citing a softer overall outlook both locally and globally as the primary driver. The next decision point is on Melbourne Cup day - a day that the RBA has changed rates every year since 2006 (interesting fact but does not necessitate a cut!). This saw our sharemarket close on a five month high. As I write this, futures markets are pricing in a cash rate of between 2.25% and 2.5% by mid next year. Our Fixed Interest team thinks this is a bit too aggressive, with rates falling in its central scenario to around the 3% level on the basis that our economy will respond to lower rates and the fact that a lot of the tail risk has been minimised for Europe in the shorter term since the ECB news. The "lucky country" now needs to transition over the next couple of years from a terms of trade bonanza back to a cycle where marginal growth is driven more by the traditional housing and consumer spending inputs.  

Europe - Interest rates 0.75%. The ECB announced this month that it would buy unlimited amounts of the bonds of the naughty European governments who agree to a bail out austerity plan - this has put a floor under expectations. Will Spain become the first to apply for a rescue plan under the new arrangements? Surely this will be the case, with Spain at least going through the motions to try and get some support from the people before going cap in hand to the ESM/ECB. 

US - Interest rates 0% to 0.25%. Our last Perspective hinted that given Bernanke's positive speech about Quantitative Easing at the annual Jackson Hole conference we may see more of this and this was duly announced this month with Bernanke's pledge to print USD40 billion per month and use it to buy mortgage backed securities - given that you or I could get into a little bit of trouble by engaging in money printing it seems so wrong. But the Fed, along with other central banks, has the power to print money and get away with it. The critics see it as inflationary but it can work. Bernanke also announced a zero interest rate policy until mid 2015 and to hold rates low when growth starts to re-emerge.

UK - Interest rates 0.50%. Committed to current programme of GBP375 billion of money printing to last until November 2012.

China - China cut interest rates in June and July, and, lowered the reserve requirement ratio for banks three times since late 2011. In recent weeks, it has pumped short term cash into the money markets. China has not applied substantial stimulus, with concerns about over stimulating the property market and inflation in general. Perhaps there was also some holding back due to its "Golden Week" public holidays in the first week of June and the upcoming Communist Party Congress in early November. 

Traditionally such huge monetary stimulus leads to economic growth - with a lag – so the wait begins......