ECB and BoE in vacation mode on monetary policy in August


Neither the European Central Bank nor the Bank of England are expected to take any action at their monetary policy meetings scheduled for this Thursday. The ECB will maintain the “wait and see” stance to have more time to evaluate the impact of the package of measures introduced in June, while the BoE will refrain from hiking rates at least until September following the recent weaker than expected string of UK macro data.

ECB

“Although lending growth is still subdued, inflation still weak and the recovery remains vulnerable, the ECB will not embark on further actions any time soon,” Clemente de Lucia argues, stressing that the central bank needs more time to see the effects of the  targeted longer-term refinancing operations, or the TLTROs, on the Eurozone economy. “For the time being, their announcements just produced a moderate depreciation of the euro and a reduction of money market interest rates,” the analyst points out.

What Draghi could do however is “up the ante on QE, giving the notion that this is not a theoretical idea but rather a policy that could be implemented later in the year,” Yohay Elam speculates. In that case the euro could weaken.

Meanwhile, Jamie Coleman suggests that the ECB head could linger more on the subject of risks stemming from the ongoing geopolitical tensions, which could “pull forward the next ECB policy response to the fall of 2014 from winter 2014/2015.”

The Bank of England monetary policy announcement will not be a source of any excitement on Thursday either, the analysts polled for the forecast report agree. Gerry Davies, who believes that the “UK economy might be running out of steam after its recent growth spurt,” sees the first hike postponed until the first quarter of 2015.

Valeria Bednarik remarks that “a reduction of the assets purchase program, or a rate hike, should put Pound in ultra bullish mode,” assuring however that “ chances are really limited.” The economists consider the upcoming release of the Inflation Report as well as the monetary policy meeting minutes as events which could bring more details about BoE's future moves and result in a stronger market reaction.

The BoE and the ECB will announce their monetary policy decisions on August 7 at 11:00 and 11:45 GMT, respectively. Below you will find the full forecasts of the contributing market experts.

Jamie Coleman - FXBeat Editor:

Jamie ColemanECB:
"With the TLTRO program set to go into action in mid-September, it is unlikely the ECB will hint at any major policy shifts until that program is up and running. Once the ECB has an idea how much demand there is for new vehicle, it can begin to plan any necessary next steps, like QE.
 
The one risk on the horizon, that may be addressed in Thursday's press conference, is that the ECB may be forced to contend with the negative economic impacts to the European economy of the increased sanctions on Russia. If Draghi makes a major show of highlighting those downside geopolitical risks, the market will interpret that as a willingness to do more, sooner on the monetary policy front. 

Bottom line: No change in rates or policy at this meeting with a high probability of a wait-and-see attitude from the governing council. There is a chance that geopolitical factors receive more attention than in prior months, which could pull forward the next ECB policy response to the fall of 2014 from winter 2014/2015."

Gerry Davies - FXBeat Editor:

Gerry DaviesBoE:
"There’s an English saying 'never say never.' Well I’m saying the MPC will “never” vote for a rate hike at this weeks Bank of England monetary policy committee meeting. Brave of me, I know. Still think the Old Lady is likely to hold off till 2015 before hiking rates, probably 25 bps in the first quarter. Indeed I have a feeling the UK economy might be running out of steam after its recent growth spurt, evidence last weeks weaker than expected manufacturing PMI and consumer confidence data. Will be interesting to see upcoming economic data releases.

Cable has been under pressure lately, pretty much as we had expected. As I’m typing this it’s circa 1.6850. Anything above 1.7000 looks too rich to me. Indeed I have a feeling we’ll see ol’betty trade below 1.6500 before Santa comes sliding down the chimney."

Clemente De Lucia - Economist at BNP Paribas:

Clemente de LuciaECB:
"Although lending growth is still subdued, inflation still weak  and the recovery remains vulnerable, the ECB will not embark on further actions any time soon and definitely not before having a better idea of the effects on the economy of the TLTROs. For the time being, their announcements just produced a moderate depreciation of the euro and a reduction of money market interest rates. Yet, as soon as the first two TLTROs will be conducted, the effects on longer-term interest rates will be more evident. Indeed, there is no conditionality for participating to the September and December TLTROs contrary to the following ones. Therefore, banks might use this liquidity for attractive sovereign carry trade.  Lower interest rates and the euro depreciation might boost the recovery and stimulate demand for credit. In March 2015, when the first credit-conditional TLTRO will be conducted, the ECB will have other elements to assess if these measures are producing the desired effects or not. Should credit conditions continue to decline and inflation be at uncomfortable levels at that time, then the ECB might decide to embark on further non-conventional measures."

Yohay Elam - Analyst at Forex Crunch:

 Yohay ElamECB:
"No policy change is expected from the ECB. The measures introduced in June are still fresh in terms of central banks. However, the recent drop of headline inflation to 0.4% is worrying. The exchange rate has not dropped enough to lift inflation and exports. The ECB would prefer the Fed to push the dollar higher, but that has happened to a limited extent so far.

Draghi could up the ante on QE, giving the notion that this is not a theoretical idea but rather a policy that could be implemented later in the year. This could push the euro lower. On the other hand, he could note that measures are beginning to reach the real economy and that more patience is needed. After the Bundesbank talked about wage hikes in Germany, this topic could be raised by reporters, but Draghi is unlikely to dive into it.

All in all, Draghi would probably want to convey a message of confidence in the ECB's measures while having a weaker euro after this press conference. That may be hard, but not impossible."

BoE:
"No change is expected from the Bank of England at this time. The time is still not ripe for a rate hike, especially as wage inflation is low and as manufacturing took a stumble. We will probably hear more news from the BOE in the upcoming Inflation Report and the meeting minutes. Given the recent data, there is a good chance that we will see a unanimous vote for no change this time, but things might change in September. A rate hike in the UK is likely towards the end of the year."

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

Adam Narczewski ECB:
"Mario Draghi is always a mystery and one never knows what to expect on an ECB meeting. Still, this time we should not have any surprises. Sure, inflation in the Eurozone has fallen but the ECB stated it will observe how the situation changes after the implementation of the recent easing measures. They need a couple of months to come up with some reliable feedback. I would be surprised then if any new measures are implemented on the upcoming meeting although with Draghi, you never know. If any QE in the Eurozone will be announced or mentioned, the EUR should depreciate."

BoE:
"The market reacts stronger to the BoE meeting minuted and the inflation report rather than to the interest rate decision. The statement the BoE releases is usually very short and in the current economic situation of the UK, it should not be surprising this time. I do not expect interest rates will be hiked this time (although this can happen soon) and the BoE will try to avoid any hawkish statements - a strong pound is not what Mark Carney wants to see right now."

Ahmad Mamdouh - Analyst at ICN.com:

Ahmad MamdouhECB:
"Notwithstanding the recent drop in inflation in the euro area to lowest level since late 2009, the ECB is unlikely to take any monetary action this week, as policymakers will probably wait to see the impact of the measures announced in June, including the cut in deposit rate to negative areas."

Ahmad Sweiss - Analyst at ICN.com:

Ahmad SweissBoE:
"The members of the BOE's Monetary Policy Committee are definitely coming under pressure, and perhaps, will be increasingly divided, in the coming months, with the arrival of two new members; Kristin Forbes who joined last month and Nemat Shafik, who joins the next meeting, where both might stir the argument for an early hike to the UK’s record-low interest rates. But with the MPC still worried about inflation and housing market and last month's higher-than-expected inflation was probably a one-off effect that could be reversed next month, the banks is unlikely to take action Thursday. We believe rates will be held at 0.5%, and asset purchases at a size of 375 billion pounds, at least until the MPC receives further confirmations about the strength of wage growth."

Valeria Bednarik - Chief Analyst with FXStreet:

ECB:
"Draghi has acted in June cutting the benchmark interest rate to 0.15% and introducing negative rates for interbank deposits, but seems not enough, and I’m not sure there’s a plan B ready for the upcoming meeting. Next logical step would be to launch an assets purchase program, but that’s easier to say than to do. Anyway, the most likely scenario for upcoming ECB meeting is a wait and see stance, moreover considering TLTRO is estimated to be launched in September. EUR reaction afterwards seems hard to predict, but my take is that inaction from the Central Bank is more harmful for the currency than an announcement of extraordinary measures, which at the end will show they are doing something besides talks to fight deflation. Somehow, I can’t see the EUR/USD recovering ground during the next days, beyond the 1.3500 mark."

BoE:
"For the BOE, market is again expecting a non event there; next probable move will likely be a rate hike, but surely not this year. Any unlikely surprise, like a reduction of the assets purchase program, or a rate hike, should put Pound in ultra bullish mode, but chances are really limited. Attention, when it comes to the UK Central Bank, focus on Minutes 2 weeks after the meeting."

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