King Defeated on Vote to Increase Asset Purchases!

In the U.K. the Bank of England (BoE) revealed that Governor Mervyn King was defeated earlier this month in a vote on increasing asset purchases to £400 billion. The majority of the Monetary Policy Committee (MPC) believes that further quantitative easing “could lead to inflation expectations drifting upwards [from a present level in excess of 2%]” and that “the costs of more QE outweighed the benefits for now.”

BoE Governor Mervyn King, who voted in favor of the proposal, argued that “further asset purchases […] could facilitate a smoother path towards the economy’s new equilibrium, help prevent a more persistent reduction in spending, and thereby avoid potentially lasting destruction of productive capacity and increases in unemployment.”

Moody’s has recently downgraded Britain’s credit rating from Aaa to Aa1. Sarah Carlson, a Senior Credit Officer at Moody’s, said that the downgrade was due to “the combination of weak growth outlook, substantial fiscal challenges, high and rising debt burden, and the deterioration in shock absorption capacity.” Moody’s estimates that the “continuing weakness in the UK’s medium-term growth outlook” will continue until at least 2016.

According to the National Institute of Economic and Social Research, the British economy would grow by 0.7% in 2013.

Shirakawa Says QE is Insufficient to Avoid Deflation!

Outgoing Bank of Japan Governor Masaaki Shirakawa spoke against increasing asset purchases, saying that quantitative easing by itself is insufficient to avoid deflation and stimulate the economy. Shirakawa stated that “there is no link between the monetary base and growth in consumer prices,” adding that “it’s necessary for a wide range of institutions to make efforts to boost competitiveness and growth potential.”

Shirakawa’s comments contrasted with those of Prime Minister Shinzo Abe, who said that the BoJ should adopt a 2% inflation target and start purchasing assets as part of Japan’s monetary easing program. Abe expressed his view that “the biggest economic problem is prolonged deflation and a strong yen […] Markets will only start to react once unlimited monetary easing is conducted.”

Monetary easing aims at avoiding deflation and stimulating economic growth. Japan experienced negative economic growth during the second half of 2012 as a result of its aging population, the declining workforce, natural disasters, and lower demand for Japanese exports. In order to reverse this trend, the Japanese government may weaken the yen further and raise the inflation target to 2 percent.

Eurozone Economic Sentiment Drops in March

The Zew Center for Economic Research announced that Economic Sentiment in the Eurozone fell to 33.4 in March from 42.4 in the previous month. This indicates deterioration in economic outlook and increases the likelihood of growth.

King Supports Additional Asset Purchases to Stimulate Growth

In the U.K., Bank of England (BoE) Governor Mervyn King spoke in favor of increasing asset purchases, saying it stimulates economic recovery. King stated that “there is a case for supporting that [economic recovery] through additional asset purchases,” adding that “during the course of 2013 we will see the recovery come into sight.”

King echoed Deputy Governor Paul Tucker, who stated last month he is “open to doing more QE [quantitative easing] depending on the outlook for demand and inflation” and added that “nobody on this committee thinks that QE has reached the end of the road.”

The Monetary Policy Committee of the BoE decided last week to keep quantitative easing unchanged at £375 billion. King has previously voted in favor of increasing asset purchases while Tucker opposed the move.

According to the National Institute of Economic and Social Research, the British economy would grow by 0.7% in 2013.

French Industrial Production Drops in January

The French Statistics Office Insee announced that Industrial Production dropped -1.2% in January, lower than the expected -0.2%.

The index, which reflects a decrease in industrial output, suggests low demand and a possible decline in economic growth.

Kuroda Approved as Bank of Japan Governor!

The Japanese parliament has approved Haruhiko Kuroda’s appointment as the next Governor of the Bank of Japan. Kuroda, who was endorsed by Prime Minister Shinzo Abe, has pledged to adopt a 2% inflation target and to start purchasing assets as part of Japan’s monetary easing program. The future BoJ Governor stated that meeting the inflation target is “the biggest task for the Bank of Japan’s Governor, and I’m resolved to do it,” adding that “further monetary easing is necessary [to achieve the target].”

Monetary easing aims at avoiding deflation and stimulating economic growth. Japan experienced negative economic growth during the second half of 2012 as a result of its aging population, the declining workforce, natural disasters, and lower demand for Japanese exports. In order to reverse this trend, the Japanese government may weaken the yen further and raise the inflation target to 2 percent.

Japanese Economy Minister Akira Amari stated last month that the “Abe administration attaches its highest priority to existing from prolonged deflation partly accompanied by the appreciation of the yen, and revitalizing the economy.”

U.K. Retail Sales Rises in February

The British Retail Consortium announced that U.K. retail sales rose by 2.7% in February from the previous year. BRC Director-General Helen Dickinson said that the index reflects a “gradual improvement and consumers feeling a bit more positive.” However, this does not necessarily reflect a long-lasting improvement in the British economy.

The National Institute of Economic and Social Research estimates that the British economy would expand by 0.7% in 2013.

Rehn Says EU Budget Should Not be Raised

In the EU, European Economic and Monetary Affairs Commissioner Olli Rehn spoke against increasing the EU budget, saying that the EU lacks sufficient funding to raise the budget. Rehn said that he fails to understand “where on earth the stimulus money could have come from” and added that because “the debt exceeds 90 percent of the gross domestic product in the EU, I do not think that there is room for maneuver to leave the path of consolidation budget.”

Rehn responded to statements made by officials such as European Parliament President Martin Schulz, who criticized the proposed EU budget, calling it “unacceptable.” Schulz spoke against the proposed spending cuts related to energy and infrastructure and stated that the “EU must maintain support for future-oriented policies, boosting competitiveness and research.” Schulz added that until 2020, the budget would be “frozen at roughly the level of the 2011 budget [and] we will not accept what amounts to deficit budgets.”

German Chancellor Angela Merkel said last month that the budget was supported by all EU members and is a positive signal for investors.

Kuroda Rules Out Purchasing Foreign Bonds!

Haruhiko Kuroda, the next Governor of the Bank of Japan, said that the BoJ should not use its foreign currency reserves to buy foreign bonds. Kuroda said “there is no need to consider buying foreign bonds,” adding that achieving “stability in foreign exchange markets […] is not part of the BoJ’s duty as a central bank.”

Kuroda refuted statements made by G-20 finance ministers, who implicitly criticized Japan for the recent depreciation of the yen and agreed “not to target exchange rates for competitive purposes.” This followed a statement by the G-7 in which the Group affirmed its “committed to market determined exchange rates,” adding that “fiscal and monetary policies […] will not target exchange rates.”

The Japanese government announced in January it may buy EU bonds to support the euro relative to the yen. A strong euro would boost Japanese exports to Europe and support economic growth.

U.S. Small Business Optimism Index Rises in February

The National Federation of Independent Business announced that the Small Business Optimism Index rose from 88.9 in January to 90.8 in February, lower than the expected 91.3.

The index shows that 75% of small business owners think that business conditions would remain the same or deteriorate within six months.

The American economy is expected to grow by 2.5% in 2013 and 3.5% in 2014.