Axel Merk August 7, 2009
At Thursday’s meeting the Governing Council of the European Central Bank (ECB) kept the interest rate on the main refinancing operations of the Eurosystem at 1.00%.
In the press conference following the announcement, ECB President Trichet repeatedly stressed that just because recent economic data have been encouraging ("the pace of contraction is slowing"), a sustainable economic recovery in the near term is far from certain.
In particular, while some supply issues in the banking system remain, i.e. some banks being reluctant to extend credit, the predominant force in the market is a continued demand destruction: businesses and consumers are not borrowing as a response to the deteriorating economic environment. It is the classic central bank problem that one can provide an unlimited amount of liquidity, but if there are no takers, the money will not flow into the economy. Trichet says the ECB will not bypass the banking system and lend directly to businesses or consumers (although the recently enacted covered bond purchase program, albeit small, can be considered as such).
We share the concern about continued demand destruction. In our assessment, money supply growth in recent months in both the U.S. and Europe suggests the economic recovery may be fizzling. We are particularly concerned that any nascent economic recovery will receive another blow this fall should massive refinancing requirements, particularly in the public sector, push up interest rates.
Axel Merk Merk Investments President and Chief Investment Officer
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