Another ECB rate cut possible shortly; BoE might announce more QE

ECB's February monetary policy meeting draws market attention as many think another 25 bps rate cut is imminent, although it is not sure whether Mario Draghi will proceed with it next week, or will want to wait a little longer. The BoE on the other hand will surely maintain interest rates unchanged; there is however a possibility it will announce another round of QE.


In the opinion of Adam Narczewski, the ECB "is strongly considering another interest rate cut." The question remains when Draghi wants to carry it out. Bill Hubard evaluates the possibility of a cut in February at 60%, Adam Narczewski at 40%, while other analysts polled for our special forecast report consider it more likely further into the year, depending on the developments in the Eurozone and the economic performance in the area.

For Layalee Ramahi the hot topic at the press conference following the interest rate decision will be the Greek PSI deal and "if the ECB at the end will endure the loss as well." There is also a possibility that Mario Draghi will hint at "some sort of facilities," according to Valeria Bednarik.

Even though all of the analysts polled agree that the BoE has some more QE in store, they remain divided on when it might be announced. Yohay Elam claims that "there is a strong case for another expansion of the Asset Purchase Facility, probably by an additional 75 billion pounds," and he lists the contraction of UK economy in Q4, the rise in the unemployment rate and a drop in inflation among reasons indicating this move at the upcoming meeting. Adam Narczewski believes however the BoE will adopt a "wait and see" stance for now as recent "macro data has been been showing improvement in the UK economy."

The BoE and ECB monetary policy meetings will take place on February 9 at 12:00 and 12:45, respectively. Below you will find full commentaries from the contributing experts.

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

"The European Central Bank is strongly considering another interest rate cut, that is for sure. Will they do it now? I am opting for the scenario that the ECB will want to wait some more time. Recent macro data has been showing improvement in Europe (despite troubles in Greece, Portugal, Italy….) and Mario Draghi will want to see if this will go on. Also, the overnight depo rate is currently at 0,25%, so if the central bank cuts the main interest rate, it will have to narrow the range of the depo rates in order to keep it above 0%. I see a 60% chance of interest rates remaining at their current 1% level, with a 40% chance of a 25 basis points cut."

"The Bank of England does not have many options but to follow the 'wait and see' policy. Macro data has been been showing improvement in the UK economy so in my opinion there is no need for the BoE to act at this moment. Obviously, interest rates will remain unchanged."

Yohay Elam - Analyst at Forex Crunch:

"There is a relatively low chance that Mario Draghi will cut the interest rate to 0.75%. Most economic indicators across the continent point to a recession, and a rate cut could help the economies. But the move will likely run into opposition, as 1% is the lowest rate ever, also during the worst days of the financial crisis. In addition, headline inflation is still above the 2% target, at 2.7%. It's clear that for Draghi, headline inflation isn't the 'single needle in the compass', but he will have a hard time convincing other members.
Draghi takes pride in the LTRO operation that stabilized the banks. This will likely be the focus of the press conference, towards the next operation at the end of the month."

"There is a strong case for another expansion of the Asset Purchase Facility, probably by an additional 75 billion pounds. Among the reasons for further monetary easing: the recent expansion of 75 billion pounds from October already ran its course, the economy contracted in Q4 2011, the unemployment rate is on the rise and inflation is significantly dropping from the peak. This will likely weaken the pound, despite the high expectations for this move."

Bill Hubard - Chief Economist at

"Asked about the possibility of a further rate cut, Draghi replied in the Q&A session of the January meeting that 'we will monitor all developments and stand ready to act.' This suggests that the ECB could cut rates further to 0.75% IF financial tensions were to escalate. The central bank identified such tensions as the major risk to the economic outlook.  He also tried to reassure bond markets that the 'private sector involvement', that is the restructuring of Greek debt, would remain a unique event and none of Draghi’s comments during January’s Q&A suggest that the ECB would be ready to directly tackle escalating tensions in sovereign bond markets.
Prior to the January 'presser' we had 'pencilled in' a 40% chance of a further 25 bps rate cut at the February meeting, but after the Draghi comments and the confirmation on January 11th that the Eurozone recession could spread further to Germany (we are now forecasting German GDP for 2012 at -0.50% and for 2013 at -1.50%) in late 2011, we raise the probability for such a final cut to 60%, but with ECB the most likely month for a cut is now March 2012. Thereafter, the ECB will likely stay 'on hold' until the end of the year."

"We are more optimistic for 2H12 given tax changes will put an extra £1.0bn in the pockets of low- and middle-income earners while compensation payments from the miss-selling of payment protection insurance will also help. Key will be the sharp drop in inflation, which could finally allow real incomes to turn positive in late 2012. Furthermore, assuming we do get some form of resolution to the sovereign debt crisis then positive risk appetite could push asset prices higher and help boost both consumer and business confidence. Such an outcome would encourage firms to invest and get the recovery back on track. However, we are a loooooong way away from that right now and further Bank of England QE remains highly probable for February and we have 'pencilled in' an increase of 'at least' £50bn."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

"As it focuses on stimulating growth and with inflation being a non-issue, the European Central Bank could afford to be even more accomodative. Although less likely at the February meeting, another rate cut (or two) in the near term would not be a surprise, especially if the Euro-zone economic conditions deteriorate further. Despite of the recent optimism rally and the market-wide assault on the USD following the dovish Fed statement, debt crisis woes, coupled with expectations for more rate cuts and further expansion of the ECB balance sheet, should weigh on the EUR."

"With the current asset purchases program concluding in early February, the Bank of England would be likely to keep the benchmark rate unchanged at the record low 0.5% level, but might announce an expansion of its quantitative easing operations which could be set to resume as early as March. The previous 75 billion expansion was considered by some as a "vote of no confidence" in the EU leaders' ability to deal with the debt crisis. It would be interesting to see if the Monetary Policy Committee members continue to share that view. As far as currency impact, it would not be shocking to see some selling pressures starting to build on the GBP ahead of the bank's monetary policy meeting."

Layalee Ramahi - Strategic Manager at

"The European Central Bank is still center stage and still looked at from the market for more to help end the debt crisis. I have always been a supporter of unconventional measures that the ECB can take including what I saw a strong support which was the three-year loans. Although many downplayed the move to be effective on markets yet I can say it helped in stabilizing the crisis and containing the damage from a financial freeze. The sentiment has been improving and the bond market tension eased slightly with the interbank lending freeze down from its peak. I still am looking forward for the second round of the three-year loans at the end of February and although Draghi’s tone at the previous press conference was more downbeat over the prospects for the economy I still see the Governing Council’s decision to take rates below 1.0% not to be taken lightly and I do not see it taking place in February or at all as a matter of a fact unless conditions take a drastic turn to the worst -which then will be our least worry- and by that time I withhold the right to change my mind! The assessment is the most important clue now and the progress with Greece, and unless we see the talks breakdown unexpectedly then I can tell you the ECB will come up with a new game plan for the coming meeting but not before. For me the most important factor will be Draghi and what he has to say on the Greek writedowns and if the ECB at the end will endure the loss as well."

"The clock is ticking on the expansion of the APF for the BoE as it runs its course this month and was the matter of debate in the past period whether another move will follow this meeting. The economy is indeed under pressure especially after the contraction in the fourth quarter and seemingly a mixed start for 2012. February is a critical month since the eyes are on the Inflation Report and although I can clearly see that the economy is not out of the woods I still do not see the MPC rushing into another expansion this month, especially as the global sentiment has been improving since the start of the year. I do expect the bank to act shall the contraction pace carry on from the fourth quarter into the new year though I did not see the pressure in the minutes of the last meeting or felt the urgency from policy makers to support the ongoing bets for a February increase which is think has been toned down in the market over the past weeks."

Valeria Bednarik - Chief Analyst with

"The ECB is running short of weapons to deal with the endless crisis of the area, while in general authorities in the euro area tend to delay their decisions, being latest example of that, Greece talks with creditors on debt swaps. On the other latest rate cut has took place on December 8th, when the Central Bank decided to undo 2011 Trichet’s movements and return rates to 1.0%, and I’m not convinced they would feel comfortable with a lower rate. Having said so, I would expect anyway a dovish statement, and higher possibilities of some sort of facilities, rather than a rate move for this month."
"Earlier this month, BOE’s governor Mervyn King has warned that the UK path to economic recovery would be 'arduous, long and uneven' after official figures showed the national debt had hit £1tn for the first time. Also he stated that slower inflation gives policy makers room to increase bond purchases to aid the U.K. economy and guard against a 'renewed severe downturn,' leaving then doors opened for further QE. He also expressed his concerns about the European situation, threatening global stability. While further easing may be seen later this year, I won’t be expecting the BOE to take actions over the upcoming February meeting as inflation has been falling, according to King’s latest statement past January 24th, and the BOE tendency to wait and see will likely prevail."

Alberto Muñoz - Forex Analyst at

"A cut rate seems very unlikely to me as Draghi said that inflation rates would remain above 2% for several months to come; instead the ECB decided to ease its funding rules for banks, pumping near 500 billion euros into the financial system. Therefore don't expect a rate cut at least until the second quarter of 2012."

"Though Bank of England Monetary Policy Committee members voted unanimously at the last meeting to keep policy unchanged, last minutes showed there were divisions about the inflation outlook and the need of more quantitative easing. One group considers that  there are still deflation risks so QE is necessary, while the other group says that it's not likely that inflation will fall below BoE target in the next months.
Anyway probably the Bank of England will wait until knowing January CPI data before taking a decision regarding QE. Last UK CPI released data showed that inflation fell to a six-month low of 4.2% but this is still far from the Bank’s 2% target so there's room enough to wait; also there are risks if the BoE finally starts another dose of QE as it could reach eventually 400 billion pounds, which is equivalent to a quarter of UK GDP and quadruplicates the size of the bank’s balance sheet from where it was before the financial crisis hit."

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