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Goldman Sachs Sees More Easing in Europe and UK

Thursday, 4 Jul 2013 | 10:03 AM ET
European Central Bank (ECB) headquarters in Frankfurt, Germany.
Hannelore Foerster | Bloomberg | Getty Images
European Central Bank (ECB) headquarters in Frankfurt, Germany.

The European Central Bank said it would keep monetary policy loose for an extended period of time on Thursday, while the Bank of England said bond yields had risen too far, too fast.

Those statements from policymakers sparked a major rally in European stocks and weakness for the sterling and the euro.

It was the first time the ECB had offered explicit forward guidance about future policy, with ECB President Mario Draghi saying the central bank had an open mind on all rates, including the discount rate.

In a prescient piece of research, just hours before the two central banks issued their statements, Goldman Sachs said both the ECB and the Bank of England (BoE) could launch fresh monetary easing measures within months.

(Read More: Euro Slides as Draghi Commits to Low Rates)

"More unconventional easing is likely in the U.K… In addition, the ECB is more likely than not to ease further from here," said Goldman Sachs analysts in a global outlook piece published on Thursday.

Goldman Sachs said neither central bank was likely to raise rates before mid-2015, and added that the ECB could instigate a deposit rate cut and/or credit easing if the euro zone economy weakened further.

"We are… more open to potential opportunities in Europe than for some time. Although the growth picture there remains weak, our forecast is for some improvement (albeit from a low base), including in the periphery, as fiscal drag fades there too. And the prospect of fresh easing — in the U.K. and in continental Europe — is higher than in many other places," wrote Goldman Sachs.

Research firm Capital Economics agreed on Thursday that both the ECB and the BoE were likely to engage on additional easing this year. The forecasts come after weeks of volatility in global financial markets following hints in May by the U.S. Federal Reserve about the tapering of its $85 billion monthly asset purchases.

"Despite the expected scaling back of quantitative easing [in the U.S.], monetary conditions will remain very accommodative for a long time to come. The Bank of Japan should take up some of the slack as the Federal Reserve reduces its asset purchases. And we think there is likely to be additional policy easing by the ECB and Bank of England in the coming months," said Capital Economics' Andrew Kenningham in a research piece on the global economy.

(View More: Anchor Grills Draghi on Forward Guidance)

Foreign exchange broker Forex.com said the BoE gave a "clear hint" that more quantitative easing could be on the cards in its policy statement on Thursday.

"The Bank stated that 'the implied rise in the expected future path of the Bank Rate was not warranted by the recent developments in the domestic economy'. This is a clear hint the BoE could be on the cusp of more asset purchases in an attempt to bring down rates," said Kathleen Brooks, a research director at Forex.com.

However, Howard Archer, the chief U.K. and European economist at IHS Global Insight, said the argument for further asset purchases in the U.K. had been diluted by recent upbeat economic data.

"We are now increasingly leaning towards the view that more quantitative easing will only occur should the economy suffer a marked relapse over the coming months — which certainly cannot be ruled out given still significant domestic headwinds, as well as still significant concerns and uncertainties over the global economy and the euro zone in particular," said Archer.

He concurred, however, with Goldman's view that the BoE would hold rates until mid-2015 at the earliest.

(Read More: Carney Shows Markets Who's Boss as Sterling Falls)

—By CNBC's Katy Barnato

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