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Coffee Break Report

Yesterday’s big surprises came two fold. One from Sweden, who cut their benchmark rate into negative territory, to -0.1%. The Riksbank is actually the first bank to change the main repo rate to a negative, with other central banks choosing to leave the main rate north of zero and only have their own overnight deposit facility rates below. On top of the rate cut, Sweden added about €1 billion worth of asset purchases to the bank’s mandate – a token gesture, but something that sets the precedent for further stimulus.

The Bank of England was the second surprise. It wasn’t the admission that inflation is likely to fall below zero in the near future, it was comment that the Bank would be willing to cut interest rates further if it looked like the threat to the economy was significant. We’ve been at 0.5%, a record low, since 2009 and the talk up until this comment was very much on when rates might rise

Both central banks reacting to deflation in such a way is a worrying sign that they are running out of conventional monetary policy options and the unconventional routes are becoming more of the norm, for ‘non-crisis’ economies.

Greek banks have been given an extra €5bn in loans from the ECB, to cover the risks of cash points running dry if Monday’s continued negotiations don;t go as planned. Daily withdrawals from Greek ATM’s are about €250m per day at the moment but that could well spike. Looking at the single currency, which performed strongly yesterday, you’d think the market was betting on there being a deal on the table that was close to signing – which is a far cry from the reality.

In Ukraine, a 13 point ‘Minsk 2’ agreement has been signed multilateraly. We’re hopeful it sticks, but it’s likely to be a good few weeks until we know. If it is successful it could pave the way for quick removal of Russian sanctions – which Moscow will hopefully be aiming for.