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Eurozone Retail Sales Fall

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Eurozone Retail Sales Fall

Eurozone Retail Sales figures have fallen again this month according to data just released by Eurostat. The year on year reading is now showing Retail Sales growth to be just 0.9%, this is below the previous month’s revised 1.0% a level that markets were hoping to match today. Month on month figures have improved however and are now being reported as 0.3% growth this month, beating last month’s 0.1% expansion and easily ahead of the -0.2% anticipated market consensus.

As the European Central Bank (ECB) prepares to meet this Thursday it appears that a new front is slowly opening up in their battle to create economic activity within the Eurozone.

Informal monetary tightening is becoming evident within the banking system. One day unsecured interbank lending is now beginning to take place at rates above the official ECB 0.25% refinance rate. Over the past few weeks a growing number of transactions have been recorded that exceed this official benchmark level. The average rate during this period has been almost 40 basis points higher than the refinance level set by the ECB as banks become willing to pay a small premium to access funds rather than undertake a short term Central Bank transaction.

This unofficial monetary tightening comes at a very bad time for ECB policy makers. Inflation is perilously low and economic activity is not really showing convincing signs of acceleration. The ECB is under pressure to announce a program of quantitative easing at this week’s Governing Council meeting in order to create stimulus and attempt to stave off deflation. This informal raising of rates by the banking sector however may mean that action on the refinance rate itself may also be considered. Although this is unlikely to occur this week as the problem is only developing and the ECB attitude tends to be to wait and see what happens, it is now more likely that interest rate action will be on the cards over the coming months.

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