Will the ECB act to save the euro?

The annual meeting of the world’s central bankers at Jackson Hole looms large on the horizon.Will the ECB act to save the euro?Two years ago FED Chairman Ben Bernanke used the symposium to launch QE2, and with the markets set to again be disappointed by the lack of announcement of another round of outright bond purchases.

Will the ECB step into the Fed’s void and announce a plan to cap bond yields in Spain and Italy?

The euro is trading up against the Dollar and Sterling after ECB executive board member Jorg Asmussen lent his support to the idea.

His opinion carries weight in the markets because of his close relationship with Angela Merkel, and it is German opposition to bond buying by the ECB that is the main reason peripheral bond buying has not already happened on a large scale.

But it still remains unclear whether the ECB will actually act.

Capping bond yields would require an open ended commitment by Mario Draghi which looks unlikely considering when the bank undertook both LTRO’s it was capped at a certain amount of the balance sheet.

Any move by the ECB would also need to be accompanied by further conditionality by the periphery, probably further austerity measures.

Both will take time to agree, which may make next month’s meeting slightly early for the ECB to act.

UK government borrowing figures were worse than expected yesterday, disappointing the market and ratcheted up the pressure of the Chancellor George Osborne to move towards policies aimed at growth.

The UK consumer continues to deleverage, firms are still hoarding cash and foreigners, especially Asian, remain heavy savers.

As long as all three above remain net savers the government will need to borrow, so it is vital the government promotes policies aimed at reducing private sector net saving, like the funding for lending scheme.

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