ECB and BoE: More rates cut and QE to come in August?

The recent very auspicious comments by ECB President M. Draghi have boosted risk appetite bringing in some relief among investors and have triggered a short squeeze in EURUSD. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, “believe me, it will be enough.”

ECB vs EURUSD

Economic Event Data Pages:
• European Union: ECB Interest Rate Decision
• United Kingdom: BoE Interest Rate Decision


Some of the analysts polled for the European Central banks forecast report, like Yohay Elam, Analyst at Forex Crunch, think that August will be the time to intervene again: "There is a chance that Mario Draghi will cut the interest rate once again in light of the recent deterioration. The ECB might also introduce even looser collateral rules. What is more needed is a resurrection of SMP - the ECB's bond buying program. Spain is practically begging for this after not being rewarded by the markets for more austerity. Draghi might hint that this will be possible under certain conditions."

Valeria Bednarik, chief analyst with FXstreet.com believes that options at this point are either to launch another round of LTRO, or what Nowotny has proposed this Wednesday: extend a banking license to the ESM fond to give it more firepower to fight the crisis. She also explains that "both options should be on the table this month and while it will likely favor an euro recovery across the board and bring some relief, I believe it is not enough to restore confidence in the euro area."

There are other analysts who expect the ECB not to act this month. Alberto Muñoz, Forex Analyst at FXstreet.com, is in line with this idea: "I'm afraid that ECB won't make a move as long as Draghi remains still. Probably the ECB will announce its intention to lower rates again but don't expect too much." Bill Hubard, Chief Economist at Markets.com, notes that the August ECB meeting has historically been a ‘phone-in’ as most members are enjoying their ‘holidays’ and he expects August 2nd will go according to plan.

BoE should be quiet
The BoE is not expected to take any steps further in August, the most part of the analysts said. "I do not expect action on the August meeting, but I see a chance for an interest cut by the BoE in September. The IMF is suggesting such cut and I believe the BoE will go for it." Adam Narczewski, Financial Analyst at X-Trade Brokers, XTB, explained. However, the focus will be in the meeting's minutes halfway through the month, according to Steve Ruffley, Education consultant Intertrader.com, "and to whether there have been anymore dissenters/advocates for yet more asset purchases."

Caroline Newhouse, Senior Economist at BNP Paribas, gives a clear forecast of what the BoE will do in the second half of the year: "We expect another GBP 50bn of conventional QE in November, as well as a 25bp cut in the Bank Rate."

Read below the full opinions of market experts gathered by FXstreet.com:

Bill Hubard - Chief Economist at Markets.com:

ECB:
"The August ECB meeting has historically been a ‘phone-in’ as most members are enjoying their ‘holidays’ and I expect August 2nd will go according to plan. As chairman Bernanke mentioned last week and NOT discussing the IOER programme for US banks as the FOMC wanted ‘more time’ to evaluate the fiscal impact of the ECB’s most recent decision to cut the deposit rate to 0.00%. IF the FOMC wants to wait, so WILL the ECB!!! Although we expect another 25 bps rate cut by the ECB before year-end, it will NOT occur in August."

BOE:
"With the BoE expressing some concern about higher rates charged on mortgages and loans to smaller companies, it does seem that if those rates do not come down over the next few months, once the new credit easing measures have had some time to work, the risks of a cut to the Bank Rate will increase. However, that would not likely be under serious consideration until Q4-1Q2012. Like the FOMC, he BoE will also likely be closely watching the impact of the ECB’s zero deposit rate (which was announced 45 minutes after the BoE’s decision on July 5th) to see if there’s any obvious benefit.
A rate cut from the BoE is still not our base case scenario, but the BoE is clearly looking a little more seriously at the possibility. We’ve seen short sterling rally, and the 2-year yield slipped to a new all-time low of 0.168% according to Bloomberg data. GBP is underperforming, although with a BoE rate cut still far from a sure thing, we still think that EUR/GBP has little upside at the moment. But this change in rhetoric from the BoE will probably put a floor under EUR/GBP for now, as markets debate just how looooooooow Eurozone and UK yields can gooooooooo!"

Steve Ruffley - Education consultant Intertrader.com:

ECB:
"Will the ECB set a minimum and maximum yield on Euro zone bond markets? I’m afraid to say the answer is no.
Although the benchmark interest rate was cut 25 basis points last month opening many to argue for greater ECB intervention we have to remember that the European Central Bank has continually argued that it is not their job to 'bail out' periphery states such as Spain and Italy. The bank has had its chance to purchase more debt through its SMP scheme or take additional measures and we think unless something massive occurs like a full banking system meltdown you will see nothing more than little tweaks to existing programs.
Another 25 basis point cut could come towards the end of the year but expect Draghi et al to keep their bullets for now."

BoE:
"The August Bank of England monetary policy setting meeting takes place soon and many are shifting focus towards what can be done to help the ailing UK economy. The notion of extra easing right now is somewhat fairy tale-esque especially when you consider data such as CPI figures and the fact that King Mervyn  of monetary policy land has only recently implemented massive investment in small business alongside the Treasury. The so called Credit easing scheme as well as additional asset purchases should be enough for now. A rate cut as we argue has little or no impact at this juncture, which King himself has noted time and time again.
The August meeting will be lackluster and all eyes will move on to the meeting's minutes halfway through the month and to whether there have been anymore dissenters/advocates for yet more asset purchases."

Caroline Newhouse - Senior Economist at BNP Paribas:

BoE:
"Inflation is falling more rapidly than the Bank of England was actually expecting. Inflation came down from 2.8% in May to 2.4% in June. Consequently monetary authorities have all the possible leeway to  further implement quantitative easing if needed.  We thus expect another GBP 50bn of conventional QE in November, as well as a 25bp cut in the Bank Rate.  Indeed inflation is likely to fall further this year and should remain very low throughout next year. In addition UK economic prospects are clouded by the overseas outlook in the second half of this year as well as by he euro zone crisis."

Layalee Ramahi - Strategic Manager at ecPulse.com:

ECB:
"The market sentiment and conditions in the euro zone seem to take a strong turn south every month just ahead of the ECB meeting! Spain is under pressure and Greece is back in the spotlight and that all flairs the questions around Italy and the ECB remains reluctant to ease the market agony! Last month we expected the ECB to fill the void, but then again they only settled for a rate cut, it would be the best case scenario to see more liquidity pumped into the market and reactivation of bond buying to ease the strain, but since the ECB did not move till now the odds for me remain slim. The bonds purchases are clearly a message the ECB is sending they do not want to have a part in, and since the bank recapitalization is taking time and the tension it would be a sentiment booster to flood cheap money into the market again and that can only help the euro relief, as other than that the likelihood is for the ECB to remain on the sidelines this month and push the euro closer to its bearish targets!"

BoE:
"The BoE is surely not at all happy with the outlook for the U.K. economy that is deteriorating rapidly amid the deepening debt crisis and worsening global outlook. The second quarter GDP was far worse than expected and the recession is merely deepening, the BoE in the past month expanded the APF and launched the new Funding for Lending scheme with the Treasury and they still see the problematic aspects of a rate cut rather than the benefit and that will delay the odds for the cut now and even in the coming period as it only remains a sentiment card rather than the needed support. I believe the BoE will remain on hold this month and the August Inflation Report is surely to be abysmal indeed with deep deteriorating in the outlook but soon after at this rate the BoE will have to offer more, but for now they will give a chance to look through short term volatility and the outlook for the economy. "

Yohay Elam - Analyst at Forex Crunch:

ECB:
"There is a chance that Mario Draghi will cut the interest rate once again in light of the recent deterioration. The ECB might also introduce even looser collateral rules. What is more needed is a resurrection of SMP - the ECB's bond buying program. Spain is practically begging for this after not being rewarded by the markets for more austerity. Draghi might hint that this will be possible under certain conditions.
The ECB will likely wait a bit longer before launching another LTRO program. These loans seemed to do wonders at first, but they certainly backfired, as banks in Italy and Spain found themselves with big, leveraged losses on sovereign bonds instead of the anticipated arbitrage. The recent EU Summit contained a pledge to break the link between the sovereigns and the banks, and the LTRO programs just got them closer together."

BoE:
"The economic situation in the UK is worsening, as seen in recent GDP figures, and the BoE could introduce more QE, perhaps another 25 billion pounds, to show they are "doing something". On the other hand, one time events such as bad weather, the jubilee and the Olympic Games could deter the BoE from taking more action such as a bigger expansion of the Asset Purchase Facility or a rate cut."

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

ECB:
"The situation in the Eurozone is deteriorating and Mario Draghi is in the center of attention. Despite the recent interest cut, he has been reluctant to intervene in any other way. But I do not think the ECB can wait much longer. Another round of LTRO does not seem necessary at this time so much as banks got the money the needed. There is more pressure on an intervention on the bond market, especially after cutting the deposit rate to zero, which causes often times short-term rates to be negative. So I am betting on bond purchases by the ECB despite Draghi not being a big fan of this procedure."
 
BoE:
"The Bank of England is a very interesting case. The asset purchase program is not helping the economy as expected, but on the other hand if not introduced the situation might have been much worse. I do not expect action on the August meeting, but I see a chance for an interest cut by the BoE in September. The IMF is suggesting such cut and I believe the BoE will go for it."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

ECB:
"'Even though more ECB easing might not come as early as the August meeting, the threat of recession looms over the Euro-zone economy and the EU debt crisis is escalating, which would present no other choice for the European Central Bank but to give in to the political pressure and to ease monetary policy further in upcoming months. The Euro-zone economic growth is still nowhere to be seen and the future of the euro looks more and more uncertain as the euro-area's third and fourth- largest economies get engulfed by the debt crisis. It would not be surprising to see the European Central Bank producing another 25 bps cut at their August meeting, although the chances would be greater for a rate cut in September/October. An additional reduction in the benchmark rate would make the euro an even stronger contender for the preferred carry trade currency title and should accelerate its downtrend." 

BoE:
"Although the Bank of England is not expected to announce more quantitative easing in August and would be likely to keep benchmark interest rate unchanged at 0.50%, the QE door is not completely shut yet and we could see an expansion of the Asset Purchase Program in the last quarter of 2012 due to the escalating EU debt crisis and the global economic slowdown. Moreover, the Bank of England might even be forced to consider a rate cut to supplement its QE efforts. The pressure on the GBP will mount significantly when the market begins to price such expectations."

Valeria Bednarik - Chief Analyst with FXstreet.com:

ECB:
"The ECB offered a 25bp rate cut past June, failing to impress investors: the crisis has deepened with peripheral countries sinking into depression and recession, and yields soaring daily basis to record highs in Spain and Italy. Indeed, the ECB may have to take action despite Mario Draghi has claimed politicians should do the job: I would expect a strong pressure on ECB to act. Options at this point are either to launch another round of LTRO, or what Nowotny has proposed this Wednesday: extend a banking license to the ESM found to give it more firepower to fight crisis. Both options should be on the table this month, and while will likely favor an euro recovery across the board and bring some relief, I believe is not enough to restore confidence in the euro area. Further euro recovery will depend on easing crisis situation, and worsening conditions in the US, that may shift market attention back to US QE3."

BoE:
"The economic situation in the UK did not give much signs of improving with past months readings, beside an unexpected drop in the CPI that fell  in May to 2.8% from a previous 3% in April, giving the central bank the opportunity to extend its assets purchase program by £50bn, to a total of £375bn in the June meeting. With such a recent movement, the BOE will likely remain on hold this month, applying their usual “wait and see” stance. Risk comes as usual from Europe, as if the crisis continues deepening, the BOE may attempt an exceptional movement of cutting rates, but I see this taking place more in a coordinated action from major economies, rather than a standalone movement."

Alberto Muñoz - Forex Analyst at FXstreet.com:

ECB:
"LTRO showed to be a very effective measure on the last quarter of 2011 and I think that it would be an excellent idea but I'm afraid that ECB won't make a move either as Draghi remains still. Probably the ECB will announce the intention to lower rates again but don't expect too much from a central bank dominated by political interests. The only interesting thing we can expect from Draghi is an interest rate cut on its deposit facility, turning interest to negative (i.e. banks will have to pay for having their money there)."

BoE:
"The latest BoE MPC minutes suggested that "the impact of the FLS and other policy initiatives might, in time, alter the Committee’s assessment of the effectiveness of such a rate reduction". Therefore we should expect an interest rate cut in the third quarter as long as asset purchase program fails to stimulate UK economy enough."

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