Next week all eyes will be on the European Central Bank, as the Bank of England is not expected to make any moves after it had sketched a plan of future action in its latest Inflation Report. Meanwhile, the threat of deflation in the Eurozone and the elevated unemployment might push the ECB to modify its policy at the upcoming meeting.
The analysts' views on what the ECB could do in March are divided. Adam Narczewski for example sees a slight, 0.1% - 0.15%, reduction to the MRO rate. The expert on the other hand doesn't believe “Mario Draghi will have the guts to cut the deposit rate into negative territory”, a move expected by markets.
Yohay Elam believes that both the refi rate as well as the deposit rate could be reduced, in the face of the stubbornly low inflation in the Eurozone and the high exchange rate of the euro. Nevertheless, several analysts polled for the forecast report expect the ECB to “disappoint the euro bears again by not cutting rates in March,” in the words of Ilian Yotov.
“Draghi's attitude is to wait and see and as long there aren't any deflation risks, I wouldn't expect any change in ECB monetary policy,” suggests Alberto Muñoz. Meanwhile, Valeria Bednarik reminds about the latest market talk on the “possibility of ECB mounting the QE train,” adding however that she does not see Mario Draghi making that move in March. Still “if he just mentions it as possible, the EUR will likely turn strongly down against most rivals.”
As far as the Bank of England monetary policy meeting is concerned, the economists do not expect that anything new could be added to the information comprised in the Inflation Report published in February, suggesting the first rate hike could come in the first quarter of next year. Even though “the market expects interest rates could be hiked as early as this autumn,” as Adam Narczewski points out, the analysts still see it rather happening at the time indicated by the central bank.
“The sterling will remain attractive as long as the U.K. economy continues to do well and the Bank of England maintains its 'neutrally-hawkish' stance,” Ilian Yotov adds.
ECB:
"There is a good chance that the ECB will lower the lending rate to 0.10-0.15% and set a negative deposit rate of 0.10%. There is a danger that low inflation might move from the short term to the medium term, and the ECB could act according to its mandate, as it did in November. The high exchange rate of the euro in recent months weighs on exports and lowers prices. With the high exchange rate of the euro, the growing pressure from the IMF and others and the exhaustion of the talk about of negative rates without action, the time is ripe for a negative deposit rate in March. A negative rate would send the euro tumbling down, while no action would send the euro a bit higher."
BoE:
"No change is expected from the BOE at this meeting. After presenting the second iteration of forward guidance in February and practically bringing forward rate hike expectations to Q2 2015, the upcoming rate decision could unfortunately turn into a non-event. The meeting minutes will probably have a bigger effect, as they will reflect the members' thoughts about the recent reports about higher unemployment and lower inflation."
ECB:
"The next ECB's meeting can be interesting. Although the Eurozone is not experiencing any major declines, action is required. Interest rates will stay unchanged but the deposit and MRO rates can be in the spotlight. I do not believe Mario Draghi will have the guts to cut the deposit rate into negative territory. That could be an unprecedented move and I do not think the ECB is ready for this yet. On the other hand, the MRO (main refinancing operations) rate, which was cut to 0,25% could be decreased again. It is possible it will be cut to 0,1% - 0,15% since banks are already borrowing at rates above 0,1%. So I would be expecting a move in that direction on the next ECB's meeting."
BoE:
"The last Inflation Report said it all. Forward guidance is not working anymore and the BoE has dropped it. No other clear targets were given so this time the BoE should not shock us. The market expects interest rates could be hiked as early as this autumn. Although recently we have heard various MPC members suggesting such a move can be expected in the first quarter of 2015 and I am inclined to those statements."
ECB:
"The treat of deflation and stubbornly high unemployment rate will keep the ECB in an easing mode, but the central bank will probably disappoint the euro bears again by not cutting rates in March. The single currency continues to show remarkable resilience against the U.S. dollar and looks strategically positioned to test the top of the current $1.33-$1.39 range."
BoE:
"The Bank of England adjusted its forward guidance, but despite of the efforts to assure the markets that rates would not go up at least until 2015, investors continue to price a rate hike sooner rather than later. The sterling will remain attractive as long as the U.K. economy continues to do well and the Bank of England maintains its 'neutrally-hawkish' stance."
ECB:
"Knowing that the Boe/MPC meeting with be a total non-event with NO changes and NO statement, the ECB will be a delicate balance, likely to edge CPI forecasts down, but knowing that there is a BIG upward base effect in April, although it will not be much, may well be offset by a slightly higher GDP forecast. SMP non-sterilization could be deployed, but why now given EONIA is pretty well behaved relative to 5 weeks ago. Although the risk is on the side of more talk with NO action. Markets.com has felt that ever since the ‘surprise’ November rate cut after EUR/USD touched $1.3733 in October of last year, after last week’s move above $1,3750 and the 1 point decline in the Eurozone’s manufacturing PMI, we feel that there is more than a 65% probability of a 10-15 bps rate CUT at next week’s meeting."
BoE:
"Market expectations that the BoE/MPC will start to raise interest rates in the spring of 2015 are 'not unreasonable,' BoE policymaker Ian McCafferty said in an FT interview, adding he was watching in particular for inflation risks. The BoE announced a new version of its centrepiece 'forward guidance' on 12 February, linking its rate decisions to how quickly the economy uses up its spare capacity. The Bank said at the time that a view in markets that rates could rise in 2Q2015 - when Britain is due to hold an election (15 May 2015 - was consistent with its goal of keeping inflation close to its 2.0% target. He said he would pay closest attention to price pressures from any excessive wage rises or companies building up their profits, given the BoE's mission to keep inflation at 2.0%."
ECB:
"Although pushing down deposit rates to negative territories could be one of the options to stave off deflation, it seems that using other tools such as buying packages of bank loans and companies or suspending operations to absorb the money spent on buying sovereign bonds under the ECB’s Securities Markets Programme may be better, as lenders at meantime could not withstand to be charged with fees for parking their funds at the ECB."
BoE:
"The last inflation report muted hints about a near interest rate hike, albeit we see unemployment fast-approaching the 7% threshold for the bank to consider any. The economy is recovering, but slowly, and still 1.3% below the pre-recession peak. All the economy needs right now is further stability, not the BoE considering any drastic change in its emergency-setting of monetary policy, especially with inflation falling below the 2% target for the first time in more than four years, that’s why Carney must remain dovish on the 0.5% rates, at least until the recovery takes a stronger hold in the UK."
ECB:
"Market players are a bit tired of speculating on the possibility of the ECB cutting depo rates down to negative, but indeed, action is required in the EU. Despite latest YoY inflation reading came out slightly above previous one, at 0.8%, the fact is that risk of deflation is far from subdued. Anyway, seems Mr. Draghi is not willing to act just yet, which usually gives the EUR a boost, albeit this time may be different: being quite expensive against the greenback, plus the fact that the common currency has been unable to break higher over these last few weeks, suggests buyers are not as much as suspected. Adding to this picture, latest market talk turned to the possibility of ECB mounting the QE train, years later than its counterparts. At this point, I don't see Draghi activating the printing machine, but if he just mentions it as possible, the EUR will likely turn strongly down against most rivals."
BoE:
"I'm actually not expecting much from the BOE this month, as the Central Bank has made it clear its in no rush to change its economic policy, nor to rise rates this year. But market players have been pricing in a soon to come rate hike based on economic improvements, mostly expecting action there for the first half of 2015. Nevertheless, I see upcoming meeting as non event again."
ECB:
"Despite the comments from the Governor of the Bank of Finland, Erkki Liikanen, suggesting that the ECB was discussing to set negative deposit rates, I don't think they are ready to do that. Draghi's attitude is to wait and see and as long there aren't any deflation risks, I wouldn't expect any change in ECB monetary policy. In fact the market has priced in that interest rates in Europe will remain at the same level for some months and that explains the latest rally in EURUSD, though the strong resistance at 1.3770 is capping further advance."
BoE:
"I think that Mark Carney feels comfortable at the current moment as he has sent the message he wanted to send to the market. It's very likely that Carney thinks that the economic recovery is accelerating and markets have already priced in some chance of a rate hike late this year, so the strategy now is that BoE officials insist repeatedly that they have no plans to act any time soon. By doing that, Carney will probably improve UK recovery as he will contain the strong rise in pound, which will benefit UK exporters and contribute to improve the economic recovery."
The analysts' views on what the ECB could do in March are divided. Adam Narczewski for example sees a slight, 0.1% - 0.15%, reduction to the MRO rate. The expert on the other hand doesn't believe “Mario Draghi will have the guts to cut the deposit rate into negative territory”, a move expected by markets.
Yohay Elam believes that both the refi rate as well as the deposit rate could be reduced, in the face of the stubbornly low inflation in the Eurozone and the high exchange rate of the euro. Nevertheless, several analysts polled for the forecast report expect the ECB to “disappoint the euro bears again by not cutting rates in March,” in the words of Ilian Yotov.
“Draghi's attitude is to wait and see and as long there aren't any deflation risks, I wouldn't expect any change in ECB monetary policy,” suggests Alberto Muñoz. Meanwhile, Valeria Bednarik reminds about the latest market talk on the “possibility of ECB mounting the QE train,” adding however that she does not see Mario Draghi making that move in March. Still “if he just mentions it as possible, the EUR will likely turn strongly down against most rivals.”
As far as the Bank of England monetary policy meeting is concerned, the economists do not expect that anything new could be added to the information comprised in the Inflation Report published in February, suggesting the first rate hike could come in the first quarter of next year. Even though “the market expects interest rates could be hiked as early as this autumn,” as Adam Narczewski points out, the analysts still see it rather happening at the time indicated by the central bank.
“The sterling will remain attractive as long as the U.K. economy continues to do well and the Bank of England maintains its 'neutrally-hawkish' stance,” Ilian Yotov adds.
The BoE and the ECB will announce their monetary policy decisions on March 6 at 12:00 and 12:45 GMT, respectively. Below you will find the full forecasts of the contributing economists.
Yohay Elam - Analyst at Forex Crunch:
ECB:"There is a good chance that the ECB will lower the lending rate to 0.10-0.15% and set a negative deposit rate of 0.10%. There is a danger that low inflation might move from the short term to the medium term, and the ECB could act according to its mandate, as it did in November. The high exchange rate of the euro in recent months weighs on exports and lowers prices. With the high exchange rate of the euro, the growing pressure from the IMF and others and the exhaustion of the talk about of negative rates without action, the time is ripe for a negative deposit rate in March. A negative rate would send the euro tumbling down, while no action would send the euro a bit higher."
BoE:
"No change is expected from the BOE at this meeting. After presenting the second iteration of forward guidance in February and practically bringing forward rate hike expectations to Q2 2015, the upcoming rate decision could unfortunately turn into a non-event. The meeting minutes will probably have a bigger effect, as they will reflect the members' thoughts about the recent reports about higher unemployment and lower inflation."
Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:
ECB: "The next ECB's meeting can be interesting. Although the Eurozone is not experiencing any major declines, action is required. Interest rates will stay unchanged but the deposit and MRO rates can be in the spotlight. I do not believe Mario Draghi will have the guts to cut the deposit rate into negative territory. That could be an unprecedented move and I do not think the ECB is ready for this yet. On the other hand, the MRO (main refinancing operations) rate, which was cut to 0,25% could be decreased again. It is possible it will be cut to 0,1% - 0,15% since banks are already borrowing at rates above 0,1%. So I would be expecting a move in that direction on the next ECB's meeting."
BoE:
"The last Inflation Report said it all. Forward guidance is not working anymore and the BoE has dropped it. No other clear targets were given so this time the BoE should not shock us. The market expects interest rates could be hiked as early as this autumn. Although recently we have heard various MPC members suggesting such a move can be expected in the first quarter of 2015 and I am inclined to those statements."
Ilian Yotov - FX Strategist and Founder at AllThingsForex:
ECB:"The treat of deflation and stubbornly high unemployment rate will keep the ECB in an easing mode, but the central bank will probably disappoint the euro bears again by not cutting rates in March. The single currency continues to show remarkable resilience against the U.S. dollar and looks strategically positioned to test the top of the current $1.33-$1.39 range."
BoE:
"The Bank of England adjusted its forward guidance, but despite of the efforts to assure the markets that rates would not go up at least until 2015, investors continue to price a rate hike sooner rather than later. The sterling will remain attractive as long as the U.K. economy continues to do well and the Bank of England maintains its 'neutrally-hawkish' stance."
Bill Hubard - Chief Economist at Markets.com:
ECB:"Knowing that the Boe/MPC meeting with be a total non-event with NO changes and NO statement, the ECB will be a delicate balance, likely to edge CPI forecasts down, but knowing that there is a BIG upward base effect in April, although it will not be much, may well be offset by a slightly higher GDP forecast. SMP non-sterilization could be deployed, but why now given EONIA is pretty well behaved relative to 5 weeks ago. Although the risk is on the side of more talk with NO action. Markets.com has felt that ever since the ‘surprise’ November rate cut after EUR/USD touched $1.3733 in October of last year, after last week’s move above $1,3750 and the 1 point decline in the Eurozone’s manufacturing PMI, we feel that there is more than a 65% probability of a 10-15 bps rate CUT at next week’s meeting."
BoE:
"Market expectations that the BoE/MPC will start to raise interest rates in the spring of 2015 are 'not unreasonable,' BoE policymaker Ian McCafferty said in an FT interview, adding he was watching in particular for inflation risks. The BoE announced a new version of its centrepiece 'forward guidance' on 12 February, linking its rate decisions to how quickly the economy uses up its spare capacity. The Bank said at the time that a view in markets that rates could rise in 2Q2015 - when Britain is due to hold an election (15 May 2015 - was consistent with its goal of keeping inflation close to its 2.0% target. He said he would pay closest attention to price pressures from any excessive wage rises or companies building up their profits, given the BoE's mission to keep inflation at 2.0%."
Ahmad Mamdouh - Analyst at ICN.com:
ECB:"Although pushing down deposit rates to negative territories could be one of the options to stave off deflation, it seems that using other tools such as buying packages of bank loans and companies or suspending operations to absorb the money spent on buying sovereign bonds under the ECB’s Securities Markets Programme may be better, as lenders at meantime could not withstand to be charged with fees for parking their funds at the ECB."
Ahmad Sweiss - Analyst at ICN.com:
BoE:"The last inflation report muted hints about a near interest rate hike, albeit we see unemployment fast-approaching the 7% threshold for the bank to consider any. The economy is recovering, but slowly, and still 1.3% below the pre-recession peak. All the economy needs right now is further stability, not the BoE considering any drastic change in its emergency-setting of monetary policy, especially with inflation falling below the 2% target for the first time in more than four years, that’s why Carney must remain dovish on the 0.5% rates, at least until the recovery takes a stronger hold in the UK."
Valeria Bednarik - Chief Analyst at FXStreet:
ECB:"Market players are a bit tired of speculating on the possibility of the ECB cutting depo rates down to negative, but indeed, action is required in the EU. Despite latest YoY inflation reading came out slightly above previous one, at 0.8%, the fact is that risk of deflation is far from subdued. Anyway, seems Mr. Draghi is not willing to act just yet, which usually gives the EUR a boost, albeit this time may be different: being quite expensive against the greenback, plus the fact that the common currency has been unable to break higher over these last few weeks, suggests buyers are not as much as suspected. Adding to this picture, latest market talk turned to the possibility of ECB mounting the QE train, years later than its counterparts. At this point, I don't see Draghi activating the printing machine, but if he just mentions it as possible, the EUR will likely turn strongly down against most rivals."
BoE:
"I'm actually not expecting much from the BOE this month, as the Central Bank has made it clear its in no rush to change its economic policy, nor to rise rates this year. But market players have been pricing in a soon to come rate hike based on economic improvements, mostly expecting action there for the first half of 2015. Nevertheless, I see upcoming meeting as non event again."
Alberto Muñoz, Ph.D. - Forex Analyst at FXStreet:
ECB:"Despite the comments from the Governor of the Bank of Finland, Erkki Liikanen, suggesting that the ECB was discussing to set negative deposit rates, I don't think they are ready to do that. Draghi's attitude is to wait and see and as long there aren't any deflation risks, I wouldn't expect any change in ECB monetary policy. In fact the market has priced in that interest rates in Europe will remain at the same level for some months and that explains the latest rally in EURUSD, though the strong resistance at 1.3770 is capping further advance."
BoE:
"I think that Mark Carney feels comfortable at the current moment as he has sent the message he wanted to send to the market. It's very likely that Carney thinks that the economic recovery is accelerating and markets have already priced in some chance of a rate hike late this year, so the strategy now is that BoE officials insist repeatedly that they have no plans to act any time soon. By doing that, Carney will probably improve UK recovery as he will contain the strong rise in pound, which will benefit UK exporters and contribute to improve the economic recovery."
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