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View the article online at http://citywire.co.uk/wealth-manager/article/a758549

Wells Fargo's Jacobsen: The ECB has an image problem

by Brian Jacobsen on Jun 24, 2014 at 10:43

And this provides hope that perhaps the ECB and their image may improve under Draghi’s leadership. He appears to be less myopic than Trichet and able to see through the short-term noise.

The ECB is a bold actor

While Trichet seemed too timid in the face of temporary inflation that was actually just part of a disinflationary trend, Draghi has turned the ECB into a bold actor.  The ECB may end up looking indecisive if it needs to reverse course on penalty rates on bank deposits.  This could increase what’s called the “term premium,” or the difference between longer-term interest rates and short-term interest rates.  The term premium is determined by many factors, but one of those factors is investor confidence in the stability and predictability of monetary policy going forward.

The effects of monetary policy often aren’t felt in the real economy for months or years after the fact.  But it is at least the ECB is acting—and not counteracting— progress in cleaning out the plumbing of the eurozone’s financial system.

Brian Jacobsen, portfolio strategist, Wells Fargo Asset Management.

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