Stocks and commodities have rallied this morning on rumours that central banks are about to launch a coordinated market intervention following Sunday’s Greek election. Government bond yields have fallen (relief for the Spanish and Italians), while the euro reached a four-day high at $1.2685 earlier.
Gold continues to face resistance at $1,630, while $28.50 still exerts a magnetic pull on silver. However, talk from G20 officials that “central banks are preparing for coordinated action to provide liquidity” in the event that the Greek election results upset the markets is raising bullish hopes. Meanwhile in the UK, bank shares have risen after Chancellor George Osborne announced last night that HM Treasury and the Bank of England are to start a new £140 billion lending programme in the next few weeks. In the words of BoE governor Mervyn King:
“The Bank and the Treasury are working together on a “funding for lending” scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty. The Bank would lend, as in its existing facilities, against a much greater value of collateral comprising loans to the real economy to protect taxpayers. But the long term nature of the lending and its pricing mean that the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor earlier. So such a scheme would be a joint effort between Bank and Treasury.”
Though the Telegraph reports that this scheme will be introduced instead of more quantitative easing – which has totaled £325bn since 2008 – this is a distinction without much of a difference. This new lending programme and QE, as well as the European Central Bank’s “LTRO” efforts, are all ways in which central banks pump new cash reserves into the banking system, in order it is hoped to spur lending, suppress interest rates, and ward of the deflation “demon”. Central banks have succeeded in two of these three objectives: consumer prices across the developed world are still increasing, and interest rates are low. But alas, private lending remains moribund.
Hence, they will boost their money printing efforts, and talk up the economy where possible, in order they hope to encourage spending. As we’ve said before: “inflate or die”.