Thursday’s Bank of England and ECB Policy Meetings

August 3, 2011

Markets anticipate no policy changes on August 4, and I agree.  The Bank of England announcement comes first at 11:00 GMT and will only tell investors the bare bones of the decision, a continuing 0.5% Bank Rate level, which such has been since March 2009, and an unchanged asset purchase ceiling of GBP 200 billion, which was reached in January 2010.  The vote and thinking of committee members will not be learned until publication this month of the quarterly inflation outlook and, later in the month, minutes of this week’s meeting.  Economic growth in the U.K. is anemic, advancing just 0.7% annualized between the first and second quarters and also by 0.7% from a year ago.  CPI inflation dipped to 4.2% in June, but officials still think such might back upward to 5.0% in the second half of the year.  The Committee has doves and hawks but a majority committed to not changing settings until a clearer picture emerges.  Britain’s purchasing manager surveys provided more ying and yang.  The manufacturing index printed in July at a weaker than expected 49.1, lowest since mid-2009, while analysts were equally fooled by improvement in the services index to 55.4 from 53.9.

This will be the third to last ECB meeting over which President Trichet will preside.  A decision to leave the refinancing rate unchanged will be telegraphed at 11:45 GMT and be followed by a press conference starting at 12:30 GMT.  Trichet’s successor is Italian, and Italy has been this week’s main object in the never-ending EU debt crisis.  The question remains whether the Governing Council will deliver one more rate hike in the Trichet era, which is what officials have seems to suggest is more likely than not.  The problem, of course, is that growth prospects in the euro area have faded lately even more than officials expected.  The Council will never respond to a widening disparity among its members, but the composite purchasing managers index for the whole euro area with its 331 million people has fallen to 51.1 in July from 57.8 just three months earlier.  That a huge downturn in the second derivative (the rate of change) and suggests that the first derivative (the direction of change) is poised to shift from an expanding trend to a contracting economy.  The ECB never pre-commits and was not prepared to tighten in back-to-back months, so Trichet will stall for time and stress that officials will be guided by forthcoming price and activity data.  That said, the language of the statement will be parsed by analysts for any signs of delaying a rate hike to the Draghi era. 

In the press conference, two areas of questions will be of special interest.  Trichet may be asked for any reaction to the Swiss unscheduled easing announced today.  He will reply that central bankers ought not comment on the monetary policies of other central banks and that it’s entirely appropriate for central banks not to follow the same stance in lock step because each customizes its policy to the trends and other circumstances of its own economy.  Trichet is sure to be asked many questions about the Greek bailout reached in July and about what each peripheral nation ought to be doing, and he will show irritation with what he believes are questions that ought to be directed instead at political leaders in those nations.

The ECB refinancing rate was raised by 25 basis points each in April and July and now stands at 1.5%, flanked by a deposit rate of 0.75% and a marginal lending rate of 2.25%. 

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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