Next Thursday the European Central Bank will meet to decide the next movement in its search of the lost economic recovery. Fundamental data across the Euro area is weak and as Market.com's Chief Economist Bill Hubard remarks, "plethora of global PMIs’ have heightened concerns about growth in Q4 saw Eurzone PMI services and manufacturing output fall to a 39-month low in September." So, what's next for the Euro Area in the next meeting?
Experts are divided between the 'calms' who say that there will be a Calm ECB meeting with Mario Draghi no new announcements after the 'bazookas' launched in the previous months and expecting politicians movements. "Everybody is waiting for Madrid," points Adam Narczewski from XTB and adds that he expects "the ECB to leave interest rates unchanged," as "they are playing with other guns right now."
Ilian Yotov agrees and says "the European Central Bank has put the ball in the politicians court and can afford to sit on the sidelines in October." So, we could assume it will be a calm meeting.
But other experts are expecting further movements in the ECB, maybe not big announcements but new measures, more easing or more steps to boost economy. "There is a good chance that the ECB will cut the main lending rate by 0.25% as the economic situation continues deteriorating," states Yoha Elam from ForexCrunch.com. And Bill Hubard believes that the "the ECB will be cutting interest rates from 0.75% to a new record low of 0.50% sooner rather than later," if we take the fundamental data situation.
Nevertheless, Layalee Ramahi from ICN.com comments "market rates still reflect lingering expectations for another move from the ECB this month."
Alberto Muñoz from FXstreet.com also expects a cut movements, "a quarter of a percent rate cut looks very likely in October as some members of the ECB Governing Council has already pointed out that possibility." Muñoz added that he expects "a quick sell off in EURUSD after announcing the cut."
So, market is divided on its expectations. To cut or not to cut... ECB has said several times that its main focus is price stability and not boosting economy, so market can expect the ECB would be quiet after the latest announcements on bonds. The bank is waiting politicians movements and the Euro waits for Spain.
On the other side of the English Channel, the question is if the Bank of England will launch a new Quantitative Easing program. Alberto Muñoz points that "latest MPC minutes showed that the Bank of England is comfortable with the current QE levels," and "More QE isn’t a done deal and the MPC is going to want to take stock of policy actions here and abroad," comments Hubard, "Clearly the door’s still open. Even if the end of the world is avoided things are going to be subdued for a long while."
If BoE agrees to further QE, "probably the decision to increase QE will come after third quarter GDP has been released," in November. Steve Ruffley from InterTrader.com agrees and says he expects "nothing in October and potential purchases to take place at the earliest in November."
Read below the full opinions of market experts gathered by FXstreet.com:
Clemente De Lucia - Economist at BNP Paribas:
- At its September meeting, the ECB decided to leave key policy rates unchanged; the refi rate held at 0.75% and the deposit facility rate (DFR) at 0%. Ever since the ECB undertook non-standard lending measures, providing liquidity at fixed rate and full allotment for all its refinancing operations, the DFR has become the key policy rate, the one signalling the ECB’s monetary policy stance. Under this framework, a change in DFR is likely to have the biggest impact on market rates.
- The poor state of the economy pleads for further monetary easing. The central bank could decide to cut the refi rate by another 25bp before year-end. Reducing the DFR any further would be to enter the unchartered waters of negative rates, (to quote President Draghi), which would be a much harder decision. However, we do not expect an interest rate cut in October. Tensions have eased somewhat and the ECB has just updated its inflation and growth forecasts.
- Lowering the refi rate, while leaving unchanged the DFR would be far from useless. First, it would reduce funding costs for banks that are having trouble raising funds on the market and that are highly dependent on ECB liquidity. Furthermore, a rate cut coupled with the prospects of no rate hikes anytime soon could further reduce forward rates. This is likely to have an impact on the external value of the euro. The prospects of further interest rates cuts, lower yields on sovereign bonds thanks to ECB actions, and brighter economic prospects in the United States relative to the eurozone could lower the euro’s exchange rate against the dollar throughout next year.
Caroline Newhouse - Senior Economist at BNP Paribas:
- The whole question regarding further QE is whether the Funding for Lending Scheme (FLS) represents a real incentive for banks to lend to those households and businesses who need it most and who, for the most part, are in great financial difficulty. Under these circumstances and barring an upturn in the economy and pressure on prices, a further increase in the bond purchase ceiling could be adopted in November, as well as a further lowering of the Bank Rate. Inflation declined from 2.6% in July to 2.5% in August. For the fourth consecutive month, it is thus below the upper bound of the Bank of England's price stability objective (i.e. 3%).
Bill Hubard - Chief Economist at Markets.com:
- While the recent plethora of global PMIs’ have heightened concerns about growth in Q4 saw Eurzone PMI services and manufacturing output fall to a 39-month low in September as European leaders struggled to reverse the single-currency bloc’s slide into recession. PMIs in both industries dropped to 45.9 from 46.3 in August, where we had forecast a reading of 46.6. Last Thursdays report showed that the Eurozone is heading for a second straight quarterly contraction after a 0.2% decline in Q2 June as fallout from the fiscal crisis damps consumer spending and corporate investment. ECB’s ‘Super’ Mario unveiled details of an unlimited bond-purchase programme to regain control of interest rates and fight speculation of a currency breakup.
- Thursday’s “dismal” report indicates the euro area will suffer “further and appreciable GDP contraction” in Q3, “which will put it in recession in every sense of the word. Sharply falling incoming new business and employment in September do not bode well for Eurozone economic activity in Q4. We now forecast a Q3 contraction of as much as 0.4% followed by stagnation in Q4.
- An indicator of euro-area services output dropped to 46 in September, a 38-month low, while the manufacturing gauge rose to 46, a fourteenth straight monthly contraction. However, Germany saw the manufacturing index improve to 47.3 from 44.7, and French production plummeted to 42.6, a 41-month low. The prolonged gloom for manufacturers extended to Asia, where a Chinese survey pointed to an eleventh month of contraction in September and Japan’s exports fell in August, supporting the case for increased stimulus as Asia’s growth slows. This gloom is clearly reflected in headcounts falling at the fastest rate since January 2010, as companies seek to adjust to weaker demand. The euro-area’s unemployment rate is at a record 11.3%.
- Thursdays euro-area reports heighten belief that the ECB will be cutting interest rates from 0.75% to a new record low of 0.50% sooner rather than later, with the market now implying a 34% probability that the ECB may reduce its ‘refi’ rate at its next policy meeting on October 4th, although we remain in the camp that the ECB will NOT reduce rates until the November 8th meeting AFTER the US Presidential election on November 6th.
- Last Thursday’s release of the September MPC minutes injected a little volatility into cable. The near-term outlook for inflation has been revised up materially, but overall the MPC appear ready to inject more monetary stimulus. Despite last week’s flurry we would argue that GBP is currently taking almost all its cues from the relative tone of the EUR and the USD. The weaker position of the USD has allowed the cable to trend higher since mid-July.
- Bank of England policymakers judged Britain's short-run inflation outlook had darkened earlier this month, but some still thought they would probably need to inject more stimulus. The BoE said higher oil prices and the threat of increased food and utility bills to come meant that inflation was unlikely to slow as rapidly as they had forecast one month earlier, squeezing consumers' disposable income. But the overall outlook for growth remained subdued - sufficiently so that one of the 9-member committee said there was a "good case" to step up the BoE's programme of asset purchases NOW.
- For the rest of the MPC, it was a "relatively straightforward" decision to stick with the 4-month programme of £50bn of asset purchases agreed in July, which will run through until November. But economists have been keen to see if the MPC is now tilting in a more hawkish direction since the CBI's former chief economic advisor Ian McCafferty succeeded arch-dove Adam Posen at the start of September.
- Two weeks ago, 2 MPC members who opposed restarting asset purchases in July, Ben Broadbent and Spencer Dale, expressed doubts about the ability of more QE to help the economy, while one previous QE advocate, David Miles, said his mind remained open about whether more would be needed in November. In August the BoE slashed its growth outlook for this year to zero and sharply downgraded its medium-term forecast as euro zone "storm clouds" cast a long shadow and scars from the global financial crisis appeared deeper than previously thought.
- The 9-member BoE/MPC voted 9-0 to keep the target at £375bn. All members also agreed to hold the benchmark interest rate at 0.5% Global central banks are continuing to loosen policy as the euro-area debt crisis continues, threatening global growth and financial stability. The BoJ unexpectedly expanded its asset-purchase fund, a week after the FOMC voted to extend its QE programme. The ECB has agreed to buy the bonds of governments that accept austerity conditions to tame the euro turmoil.
- More QE isn’t a done deal and the MPC is going to want to take stock of policy actions here and abroad. Clearly the door’s still open. Even if the end of the world is avoided things are going to be subdued for a long while. The minutes showed that the September decision was “more finely balanced” for one MPC member, who saw a “good case” for adding more bond purchases this month. That’s fewer than in August, when the minutes showed that “for some members the decision was nevertheless more finely balanced, since a good case could be made at this meeting for more asset purchases.”
- The Bank last expanded QE in July and is currently buying £50bn of gilts in a programme due to run until November where we feel that the Bank WILL add another £50bn for a grand total of £425bn which should make the October 4th meeting another ‘non-event’.
Steve Ruffley - Analyst at Tradermaker.com:
- With ECB approaching once again all eyes will be on the Italian Stallion Mario Draghi to see if his planned 'bazooka' fires off a rocket or fizzles out. With German business sentiment falling for a fifth consecutive month and fears that the exporting giant may enter recession this year, the general consensus is that a rate cut is firmly on the cards.
- However, it is far from a sure thing. Given recent comments by Benoit Coeure stating that the inflation outlook does not warrant a further cut in the benchmark interest rate and Mario Draghi favouring additional short term bond buys you have to ask yourself whether a 25 basis point cut would do much to alleviate concern over the ailing Euro zone. Given the consensus though it is a fair expectation that the central bank will lower its rate, to their lowest ever level, but do not expect much in the way of a Euro currency move.
- In fact keep an eye out as if Draghi cuts rates but fails to announce something concrete to sure up the periphery we would expect the Euro to suffer on the back of its bleak outlook.
- Another Bank of England is just around the corner and the U.K economy continues to suffer at the hands of the global down turn. With credit easing measures announced earlier in the year, and further measures to boost small and medium enterprises ongoing, it certainly looks as if all measures are being used in order to alleviate the stress cracks within the economy.
- The recent policy meeting minutes also seem to support additional stimulus in the future. It certainly seems as though Swerving Mervyn is undeterred in unleashing anything and everything into the black hole that is the economy. We expect nothing in October and potential purchases to take place at the earliest in November.
- The amount is debatable but given other non standard measures still filtering through we would expect this to be slightly less than some may expect ranging £25-50 billion.
Layalee Ramahi - Strategic Manager at ecPulse.com:
- Money market rates still reflect lingering expectations for another move from the ECB this month, yet my bets are still not aligned with the expectations for an October indeed! The ECB last month announce their new bond buying plan and the governing council avoided cutting rates to a new low especially taking deposit rates into negative territories. The option remains on the table for sure as we do not expect a miraculous economic recovery into the fourth quarter but the ECB hopes for signs of stability and the ECB is very cautious of any inflation bubbles even over the horizon so the option for me in October is off the table and even too early to secure a cut before indefinitely before the end of the year. The downside risks of a rate cut at this time will be dominating the debate among members and will not be in a hurry to cut rates just yet!
- The BoE is still suffering to see any dependable signs of response from the economy, the bank till now remains very clear that gauging the impact of the provided stimulus in the past period and specially the lending scheme. There remains the everlasting question among members if it is time again to lower rates to yet a new historic rate, but the MPC sees more downside risks to the decision which favors till now their bias towards APF expansion. The program is still ongoing and this question will be revisited in November, which at the rate of tension in markets the BoE might indeed turn to with another 50 billion, but this will only be confirmed to me if we see any sharp relapse in confidence and deterioration in the euro area and deepening of the debt crisis, as if we see markets stabilize in October the BoE might stand still after repetitive expansion in the APF and delay the decision from November.
Yohay Elam - Analyst at Forex Crunch:
- There is a good chance that the ECB will cut the main lending rate by 0.25% as the economic situation continues deteriorating, and after it focused on the OMT in last month's meeting. Signs of weakness are seen also in important indicators in core countries. In the press conference, Mario Draghi will likely focus on aspects of the OMT. Contrary to the LTRO, he will probably refrain from tapping himself on the back, despite already seeing lower bond yields.
- The Bank of England will likely refrain from announcing more QE this time, as there are hopes that the Britain will exit the recession soon. However, adding more QE is certainly on the cards in November and December's meetings as the global slowdown will likely push the BOE to "do something". A rate cut is not on the agenda.
Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:
- I expect the ECB to leave interest rates unchanged, they are playing with other guns right now. At the same time I do not think that any other big announcements are going to be made on this upcoming meeting. Everybody is waiting for Madrid (will Spain ask the EFSF for aid) and after that an intervention will be expected. Until Madrid makes the move, I expect the ECB to remain rather calm.”
- I believe the BoE will extend the current asset buyback program till the end of this year. The current one is not going to be sufficient. The best solution for BoE would be to follow the ECB, not statting the exact amount and the timeline. That would give more flexibility to the bank and would give less opportunities to speculators. I do not expect the extension of the program on the upcoming meeting, maybe in November.
Ilian Yotov - FX Strategist and Founder at AllThingsForex:
- With the OMT bond buying program plan already in place, the European Central Bank has put the ball in the politicians court and can afford to sit on the sidelines in October. This, of course, does not mean that there will be no more easing in upcoming months as the threat of recession looms over the Euro-zone economy and the EU debt crisis is still far from over. It would not be surprising to see the European Central Bank producing another 25 bps cut in the final quarter of the year. Whether the ECB expands its already inflated balance sheet to buy bonds or announces an additional reduction in the benchmark rate, the euro should feel the pressure, especially if a rate cut makes it an even stronger contender for the title of preferred carry trade currency.
- After deciding to wait and see the moves of other central banks in September, the Bank of England should be ready to pull the trigger on more easing. The bank will keep its benchmark interest rate unchanged at 0.50%, but it would not be surprising to see an additional expansion of the Asset Purchase Program by 50 billion pounds. In addition, we should not exclude the possibility that the Bank of England could be forced to consider a rate cut to supplement its QE efforts if the EU debt crisis escalates, or due to further local and global economic slowdown. The pressure on the GBP will intensify if the market begins to price such expectations.
Alberto Muñoz - Forex Analyst at FXstreet.com:
- A quarter of a percent rate cut looks very likely in October as some members of the ECB Governing Council has already pointed out that possibility, so expect a quick sell off in EURUSD after announcing the cut. However we will have to wait for Draghi's press conference as any new development in the bond purchase program could spark a risk on rally in the markets.
- Un recorte de un cuarto de punto en los tipos parece muy probable en octubre, ya que algunos miembros del Consejo de Gobierno del BCE han apuntado ya esa posibilidad, por lo que deberíamos esperar un rápido movimiento a la baja en EURUSD después de anunciar la bajada de tipos. Sin embargo, tendremos que esperar a la conferencia de prensa de Draghi ya que cualquier novedad en el programa de compra de bonos podría provocar un fuerte rally al alza en los mercados.
- Latest MPC minutes showed that the Bank of England is comfortable with the current QE levels though it's expected to increase that again by £50 billion before the end of the year. Probably the decision to increase QE will come after third quarter GDP has been released: if growth comes below expectations, then take for sure that BoE will increase its QE program in November.
- Las últimas actas del MPC mostraron que el Banco de Inglaterra se siente cómodo con los niveles actuales de QE si bien se espera que lo incremente de nuevo en 50 mil millones de libras antes de finales de año. Es probable que la decisión de incrementar la QE se tome después de que se publique el PIB del tercer trimestre: si el crecimiento está por debajo de las expectativas, seguramente el Banco de Inglaterra aumentará su programa de flexibilización cuantitativa en noviembre.