Monetary policy meetings will be held in the Bank of England and European Central Bank tomorrow and the latter at least has the potential to deliver important new developments.
ECB
My guess would be that the desire to cut rates again will not yet be irresistible for the Governing Council, as also indictaed by the Bloomberg survey of economists, which suggests just a 12 percent chance of a 25 basis point cut in the main Refinance Rate. Thus far, we probably haven’t seen enough dire economic news to justify such a move, although the Eurozone Composite PMI for December only just beat expectations at 48.3, below the key 50 level, and Eurozone Retail Sales for November were pretty poor, at -0.8 percent m/m and -2.5 percent y/y, both worse than expectations. On the other hand, French figures for Industrial Production in November beat expectations.
The ECB staff forecasts for growth and inflation, released at the time of the December ECB meeting, were still too optimistic in my view, at 0.6 percent and 2 percent respectively for 2012, but even their relatively rosy outlook sees inflation falling below ‘mandate’ in 2013, at 1.5 percent. So, to summarize, they probably do have their finger poised on the trigger for rate cuts this quarter-we’d expect the main Refinance Rate to hit 0.75 percent in Q1, with a further cut to 0.5 percent later in the year. What this meeting may well bring, at the ‘post-match’ news conference, are comments from Draghi that lay the groundwork for a cut in February.
There has been some speculation that the ECB may cut its Deposit Facility rate from 0.25 percent to zero, in order to discourage banks from depositing the EUR 450bn that is regularly being parked at the ECB every night and thereby maybe encourage banks to spend the money instead on buying distressed sovereign debt, or lending to industry. I think the ECB is too clever for this – it knows that neither aspiration would be achieved by a 25bp cut in the Deposit Rate. It would also be wary of the reputational risk inherent in this strategy.
With regard to the ECB’s sovereign bond buying activities, I suspect Draghi will be pretty silent on the subject, save to possibly repeat the mantra that the ECB expects to see a fiscal solution to the crisis, and will not volunteer one of the monetary variety. (The unspoken reality being that at least it won’t before it has wrung out from politcians the necessary quid pro quo of fiscal union, or something close).
BOE
One shouldn’t expect any fireworks from this week’s meeting of the Bank of England’s Monetary Policy Committee, (MPC). Rates should be kept at 0.5 percent and the size of the Bank’s Quantitative Easing, (QE), programme left unchanged at £275bn. However, given that the Bank of England will continue to feel that the government is sticking to its side of the ‘bargain’ re. fiscal policy, and given also the continuing ominous collapse in M4-the broad measure of Money Supply, (as of November, M4 had fallen 2.6 percent year-on-year), I would expect the Bank to respond with further QE in Q1.
The purchase of the additional £75bn of Gilts announced on October 6 will be finished by February 10, and it is possible therefore that additional QE will be announced after February 8/9 meeting, but I’d put my money on March 8.
Nick Beecroft,
SAXO BANK