Preview: Thursday’s ECB and Bank of England Decisions

August 4, 2010

Neither the ECB nor the Bank of England will change their respective key rates of 1.0% and 0.5%. There has not been a rate change since March 2009 in Britain’s case or May of last year at the ECB. The Bank of England reached the ceiling of its Gbp 200 billion asset purchase plan in January; it will continue to neither boost that facility nor reverse those operations.  After months of refusal, the ECB in May began buying member sovereign bonds.  These operations were not supported by all members of the Governing Council, and they have been diminishing progressively in size.  I do not expect a formal discontinuance of this option, however.

The Bank of England’s decision will come first at 11:00 GMT and not be accompanied by a statement of explanation.  Monetary Committee member Andrew Sentance dissented from the majority in June and July, voting instead for a 25-bp rate increase.  Minutes from the July meeting did indicate mounting concern by the majority about above-target CPI inflation, which was at 3.2% in June and at or greater than 3.0% since January. Since the July meeting, sterling has risen 4.9% against the dollar and 2.2% on a trade-weighted basis.  The trade-weighted index hit a 10-month high this past week.  The pound’s strength will be disinflationary and represents a de facto tightening of U.K monetary conditions.  British real GDP accelerated to a 4.5% annualized rate of expansion last quarter, but other data point to slower growth in 3Q.  The services PMI index in July reported today was at a 13-month low and 1.9 points below its 2Q average score of 55.0.  Service-sector activity was unexpectedly brisk in the spring quarter.  Both the housing market and money growth seem to have softened.

The 500-pound gorilla in the British economy’s outlook is of course the uncertain response to draconian fiscal restraint that has been approved.  Bank of England Governor King keeps going out of his way to downplay any good economic news and to encourage markets not to anticipate a rate increase anytime soon.  The ten-year gilt yield is 7 basis points lower than at the time of the July meeting.

Euroland, which will make its decision known at 11;45 GMT, had had two big pieces of good news since the last ECB press conference at 12:30 GMT on July 8. 

  1. The stress tests found only a small number of the 91 tested banks in need of remedial immediate action.  In spite of flaws and limitations in how the tests were conducted, markets have responded favorably since the results were reported on July 23rd.  Eonia, the overnight interest rate, has retreated since spiking in June.
  2. Economic data, while exhibiting wider disparate trends among EMU members, point to economic growth in 2Q near 3.0% annualized and a similar pace at the start of the third quarter.  GDP expanded just 0.8% annualized in the first quarter, by comparison.  The euro area composite purchasing managers index of 56.7 in July was up from 56.0 in June and similar to the 2Q mean reading of 56.6.  Economic sentiment last month of 101.3 was two whole points higher than its second-quarter average of 99.3.  Industrial orders and production in April-May were 7.6% and 2.3% greater than their average 2Q10 levels.  Construction in April-May was 1.2% above its 2Q level.  Retail sales continues to lag, dropping 0.9% annualized last quarter.  However, consumer confidence improved three points between June and July.

A high level of unemployment in the euro area of 10.0% and weak money and credit growth will be a recipe for low medium-term inflation, keeping the ECB’s hawks at bay even thought producer prices climbed 7.0% annualized last quarter.  The latest CPI inflation reading of 1.7% is consistent with the target of “below but close to 2.0%.  Like sterling, the euro has been rising lately.  From a low in early June of $1.1878, it has recovered through the entire $1.20s and exceeds its level at the July ECB meeting by 3.8%.  It is also up 1.4% in trade-weighted terms since policymakers last met. 

ECB President Trichet has just fifteen months remaining on his eight-year non-renewable term.  The succession process is starting to become an issue in the marketplace.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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One Response to “Preview: Thursday’s ECB and Bank of England Decisions”

  1. […] The Bank of England as expected left its Bank Rate at 0.5% and its asset purchase program ceiling at Gbp 200 billion and released a bare bones statement informing investors that minutes of this month’s meeting will be published August 18th, one week after the scheduled quarterly Inflation Report due August 11.  The statement gave no indication of the policy committee’s latest thinking.  The last rate cut occurred in March 2009, the same time that the asset buying scheme was introduced.  The ceiling of that program was last increased in November 2009 and reached by the end of January of this year.  For background on today’s meeting, please read my preview. […]