Monetary and financial conditions more restrictive in the euro area

Monetary and financial conditions tighten gradually in the euro area, via euro appreciation and less monetary impulse. The ECB should remain prudent in its tightening cycle.

Monetary and financial conditions more restrictive in the euro area
Our measures of monetary and financial conditions for both the USA and Europe* show that since the beginning of this year the overall environment is clearly more restrictive in the euro area than in the US. In the end of 2010, the two MFCI were close.

This change is primarily linked to the global appreciation of the euro and a more rapid rebound in M2 growth in the US (thanks to quantitative easing). Note that in both countries, a rise in corporate and in sovereign yields over the last quarters.

As the ECB decided in April to engage itself in a tightening cycle (+0.25% for the refi rate at 1.25%), this will widen the gap between the US and the euro area.

Economic Impacts
Future hikes in the refi rate will have negative direct and indirect (via euro appreciation and rise in long term yields) impacts on the already weak euro area GDP growth. This should lead the ECB to adopt a prudent path for monetary tightening and only hike every two months. More on that next thursday.

* Our index for monetary and financial conditions aggregates data coming from financial markets (equities, real exchange rate, sovereign and corporate yields) and from monetary supply (interest rate, M2). We use headline inflation for calculate data in real terms. Overall index is normalized.


Wednesday, May 4th 2011

New comment:

World Economic Snapshot
CB 0.25% 1.50% 6.56% 0.1% 0.5% 1% 0.25% 12.25%
GDP 2.3% 2.5% 9.8% 2.5% 1.8% 2.9% 2.4% 4.2%
Price 3.6% 2.7% 5.5% 0.3% 4.5% 3.3% 0.3% 6.1%
UR 9.2% 9.9% - 4.7% 7.7% 7.4% 3.0% 6.0%

Last Articles

Dukascopy, ECN forex broker offers marketplace and highest liquidity for online forex trading.

Photos Libres

All publication on are provided as a service on an "as-is, as-available" basis for informational purposes only. Publications does not constitute an offer to buy or sell or to subscribe to financial instruments. We declines all responsibility for the use that may be made of said information and the consequences that may derive there from. The views and opinions expressed in this document, which are subject to change, are those of GECODIA at the time of publication. For more precision, please consult our Terms and Conditions and our Risks Disclosure.