Another QE surge necessary to win battle for risk appetite

Comment by Stuart Thomson, economist at Ignis Asset Management: "Central banks should heed the warning from the history of George Bush and refrain from crying ‘mission accomplished'. There has certainly been shock and awe as they have driven overnight rates close to zero, but global Taylor rules suggest that official interest rates should be negative, which has in turn encouraged central banks to engage in unconventional quantitative easing. The ECB is the latest central bank to join the QE party, but its move smacks of tokenism.

"The MPC has wholeheartedly embraced QE and extended the program by a further £50bn at last week's meeting. This determined policy has helped to boost risk appetite, but we believe that it must continue this occupation of the gilt market rather than focus on the exit strategy, which blunts the effectiveness of the policy by Ricardian equivalence. Indeed, the central bank should be prepared for another surge to win the battle for hearts and minds of risk appetite before the end of the year.

"The current rally in risk appetite is similar to the post 9/11 rally in 2001 and represents a bounce from extreme pessimism, but eventually petered out as the rebound in inventories was not rewarded by a significant improvement in final demand. We believe a similar pattern will emerge in 2009 before genuine recovery in 2010 gives way to further contraction in 2011. We have not yet begun the adjustment to deleveraging. Indeed, the massive addition of government leverage has increased overall global leverage, a fact evident in rising central bank reserves."

These are the views of the author and do not necessarily reflect those of Ignis Asset Management.