There are plenty of opinions circulating as to what the ECB will announce on Thursday. A broad consensus exists that rates will be lowered from their current level which is already close to zero. There is a good chance that the deposit rate paid by European CBs will be reduced to negative. With inter-bank rates so low already and money market funds already yielding nothing, I am wondering if “risk free” money market funds will start to experience value erosion over time, and if so where will the money already parked there flow?

Commercial paper is one obvious destination, but the ever decreasing yield is hardly attractive. While reaching by the banks for some kind of return is likely to cause some easing in credit conditions, it’s difficult to equate the stricter lending guidelines resulting from the AQR, with the likely easier lending criteria that will hopefully spur inflation. As soon as banks feel the need to throw money at the man on the street, the quality of assets on the balance sheet must suffer.

Surely some element of fiscal loosening would have a more stimulative effect than the eternal pushing on a string that monetary policy easing feels like. The point I am trying to make is that while they can ease rates till the cows come home, and print money like it’s gone out of fashion, we may have reached a point where the possible rewards in marginally increased economic activity may not justify the unintended consequences of reduced asset quality. The opportunities for making money for banks have diminished, and if increased regulation costs start to get passed on to customers, it’s not likely that much economic stimulus will result from easier money.

Maybe closer cohesion among the member states and a fiscal union or at least a step towards a common (easier) tax policy would be better in the long run. A rewind of the whole past 2 decades is obviously out of the question, but I still see some gaping existential holes in the EZ. Perhaps my understanding of the problems at hand is too simplistic. ForexLive readers, have you got any thoughts?