European Central bank meeting
The last couple of days have brought shock economic releases from Germany that may lead one to fear that the economy is ‘falling off a cliff’. Consider for example today’s dreadful December figures for exports (-4.3 percent) and imports (-3.9 percent), coupled with yesterday’s shock 2.9 percent decline in Industrial Production. However, these releases are at odds with the much more positive Purchasing Managers Index (PMI) readings we have seen recently.
Despite this possible emerging problem with the Eurozone’s largest economy, it seems unlikely that the European Central Bank (ECB) will announce a further reduction in its main Refinance Rate from its current 1.0 percent at the end of this week’s meeting, tomorrow. As we approach the effective floor for the official rate, (probably 0.5 percent), it may well be the case that the ECB will want to keep some powder dry for emergency rate reductions in the event of a sudden crisis, (perhaps of an Hellenic origin?). I do expect rates to come down further, and see the March meeting as a much closer call.
The other question is whether the ECB Governing Council will announce further extraordinary measures, such as further Long Term Refinancing Operations (LTRO). One hears speculation that the ECB feels that it would not want to see participation in the next 3-year LTRO at the end of this month of perhaps Euro 1 trillion, as some expect. It might feel that market conditions would then become too liquid, considering the success of the last 3-year LTRO, in December, which certainly eased funding conditions in the interbank markets, and spurred a decline in Sovereign Bond yields across the periphery.
I cannot agree with this analysis, as to suggest the ECB might see a massive take-up as ‘too much success’ seems oxymoronic to me – there was a time just before Christmas when the ECB was staring down the barrel of an impending total ‘seize-up’ of the whole Eurosystem’s bank lending market. It must be delighted with its success in avoiding that and also delighted to see the stealth loosening in interest rates that the LTRO has caused, (as it did in 2010). The three-month interbank lending rate today stands at 1.077 percent, down from nearly 1.5 percent just before Christmas and it’s heading below 1 percent, as sure as eggs are eggs, even without a cut in the Refinance Rate. Given the success of the first 3-year LTRO and the fact that collateral standards have been considerably loosened ahead of this month’s 3-year LTRO, I can’t see the ECB announcing further LTRO’s at this meeting; It may even be afraid that doing so might reduce take-up at this month’s operation.
The wording of any comments on the Fiscal Compact will be interesting. Last time the Compact was described as “an important contribution to ensuring the long-run sustainability of public finances” and there was a comment that the “wording of the rules need to be unambiguous and effective”. If the ECB feels progress is being made in this regard it will be more likely to be accommodative in monetary policy, as a reward for politicians.
Bank of England Monetary Policy Committee meeting
Recent rather meagre evidence of a slightly stronger start to the year for the UK economy, (good PMI figures-especially in the largest sector – Services, and slightly better Confederation of British Industry surveys), lead one to feel the UK will probably escape a technical recession in 2012, although it’s hardly going to feel like a powerful recovery.
The more impressive, hard data was an improvement in the Claimant Count measure of unemployment, which was almost unchanged over the last two months of 2011, compared with previous sizeable increases.
No one expects any change in the Bank’s base rate, and neither do I. The question, therefore, is whether the MPC will feel it necessary to announce more Quantitative Easing (QE) and I feel this is a much more finely balanced decision than do many analysts. I would be very surprised to see announcement of a further £75bn, and only attach a 50/50 chance to £50bn. The minutes of the January meeting contained somewhat Delphic comments which I feel spoke of a desire to see inflation actually continue its fall for a few more months before adding more stimulation.
Nick Beecroft
SAXO BANK