The upcoming ECB and BoE interest rate meetings should be rather uneventful as both central banks are generally expected to wait for more data and assess the effects of their recent actions, before deciding on further moves.
All of the experts contributing to the forecast report agree that the ECB will choose to remain in wait and see mode in February. Even though Mario Draghi was lately pointing out that the situation on European financial markets improved thanks to the measures implemented by the ECB throughout 2012, analysts are deeply skeptical as to whether this already signalizes the end of the crisis.
"The recent developments in the Eurozone showing that the economy might be rebounding could be misleading," warns Adam Narczewski who doesn´t expect rate reductions at the upcoming meeting, although he considers them necessary. Steve Ruffley on the other hand believes that the ECB should remain on hold this month. "Having spent around $1.3bn in LTRO recapitalising the banks and countless billions bailing our Spain and Greece, how much is actually left to further increase any stimulus?", he says.
The general expectation for the Bank of England's rate decision meeting is that of no changes made to the monetary policy, although some of the analysts believe there is a slight possibility of a further expansion of the QE program.
Ahmed Mamdouh suggests that both the interest rate as well as the amount of asset purchases should be left unchanged this month as the BoE "still believes in its FLS program which is the banks' favorite policy tool to bolster credit to households and businesses, especially amid the presence of inflationary concerns." Catherine Stephan adds that the central bank "would wait to know the effectiveness of additional asset purchases before taking up further monetary stimulus."
The BoE and the ECB interest rate decisions will be announced on February 7 at 12:00 and 12:45, respectively. Below you will find the entire comments of the contributing analysts.
ECB:
"The ECB are right to have a 'wait and see' stance on their monetary policy. Having spent around $1.3bn in LTRO recapitalising the banks and countless billions bailing our Spain and Greece, how much is actually left to further increase any stimulus? However lower GDP figures and higher than anticipated unemployment figures are certainly not helping matters. Unlike the US where when the markets slump there seems to be economic data that comes to the rescue, this is simply not happening in Europe. The Euro is strengthening and this will do nothing to improve exports. It is hard to see where the good news is going to come from.
Draghi maintains that the work they have already done in 2012 has improved the debt crisis, but in his heart of hearts he knows, as does the market that there is certainly a long way to go before he can say it is contained. Draghi has been criticised for not doing as much as the US to stimulate growth and for me this a good thing. Once the member states have a solid base they can rebuild. It is not a case of rebounding Spain, Greece and Portugal saw unsustainable rapid growth that was a house build on sand. They need to re build and grow in more controlled manner. The credit, spending and growth these countries saw in the last 20 years will simply never happen again.
I see no unforeseen changes to the monetary policy from the ECB next month, but we will have to read between the lines as to what will happen if the data continues to underperform."
BoE:
"Although the recent GDP figure was disappointing as Dad’s Army Jones’ would say 'Don’t panic!'. Unlike the Euro Zone that is heading for a double dip recession the UK is not looking in relatively good shape. There have been the obvious big events like Jessops, HMV and Block Buster, but you don’t have to be the best economist in the world to see how these out dated companies were way past their sell by date. Apple and the IPhone together with Sky can be single handily be held accountable for the end of all 3 of the companies mentioned. Who prints out pictures, buys or even rents CDs or DVDs anymore?
I think King will keep his rhetoric to the point. There is no need right now to start promising any more drastic stimulus. With his replacement Mark Carney waiting in the wings I think that enough ground work has been done to give the new head of the BOE a fighting chance to finally turn the UK economy around. I would expect to hear a very understated tone from King and the emphasis on looking to the future and not paying too much interest to the recent disappointing figures. Inflation will soon be the key focus as we know growth is going to remain sluggish for the foreseeable future.
I see no easing or stimulus from the BOE."
ECB:
"At its January meeting, Mr. Draghi acknowledged that the eurozone as a whole is not in good shape. However, the ECB saw (and, according to the last speeches of ECB members of the Council, they continue to see) positive signals throughout survey data, which have bottomed out and are recovering, albeit very gradually and from the reduction of current account deficits and Target2 imbalances. Lastly the Council also esteemed that inflation is still in line with its medium-term target for price stability, which means interest rates are at appropriate levels, at least for the time being.
To sum up, while it is too early to say 'the crisis is over', indicators show that the recovery, although muted, is gaining momentum. It is worth noting, however, that there has been a significant improvement in financial market conditions, but their effects have not yet passed on to the real economy. Therefore, it is too early for any 'exit strategy' or changes of the monetary policy stance which should remain extremely accommodative."
BoE:
"Activity was penalized after the one-off Olympics. Moreover, the BoE would wait to know the effectiveness of additional asset purchases before taking up further monetary stimulus. There won't be any decision at the next BoE meeting."
ECB:
"I think that an interest rate cut will not take place during the first quarter, as the situation meanwhile is stable and there is no need for any monetary action. The ECB will probably wait for the most recent economic data from the euro area to get clues about the health of the economy on the macroeconomic level after the significant improvement in the financial markets that appeared clearly in the drop in Spain's bond yields."
BoE:
"The Bank of England will keep both interest rate and amount of asset purchases unchanged in Feb. despite threats of experiencing a triple-dip recession as it still believes in its FLS program which is the banks' favorite policy tool to bolster credit to households and businesses, especially amid the presence of inflationary concerns."
ECB:
"Euro-area leaders may be optimistic about the prospects of a future recovery, but the current reality is that the euro-zone is in recession and there is a chronic contraction in its manufacturing and services sectors. At its February meeting, the European Central Bank could decide to wait for more data (like the Q4 2012 GDP estimate due on February 14), but if growth remains nowhere to be seen and the EU debt crisis flares up again, it might not be too long too long before we witness additional monetary policy easing, including another rate cut. For the time being, the euro is taking advantage of the market's expectations that the Fed will continue to push the QE pedal to the metal while the European Central Bank sits on the sidelines."
BoE:
"With the U.K. economy contracting in the final quarter of last year and triggering triple-dip recession fears, the odds have risen that the Bank of England may have no other choice but to consider another expansion of its Asset Purchase Program, while maintaining the benchmark interest rate at the record low 0.50%. The pound has come under pressure recently and could head even lower if the market continues to price expectations of more QE by the Bank of England. "
ECB:
"The recent developments in the Eurozone showing that the economy might be rebounding could be misleading. The year ahead of us will be difficult, especially the first half. The ECB still has some bullets it can shoot with – interest rate cuts. I do not expect Mario Draghi to use this weapon at the upcoming meeting though. The recent improvement will make the ECB to stay on hold with further monetary policy changes. I expect some hard times and I would like to see the interest rate cut now, not later. Still, I believe the ECB will wait and any action could expected from it when the situation worsens."
BoE:
"The British economy is struggling and austerity measures could be required. On the other hand the BoE already has done a lot and I do not believe it will act now, or in the upcoming months. I expect some action from the BoE in the second half of the year, when Mark Carney (current Canadian central bank governor) will take the BoE governor’s positions. Actually, the markets are sensing he is the person who will ease monetary policy even further. Markets could be even discounting that scenario as we seen the GBP depreciating since the beginning of the year."
ECB:
"The European Central Bank is not expected to make any change in policy. The previous meeting saw a significant shift from hinting about an upcoming rate cut to a unanimous decision against it. Making another big shift in either direction now could hurt the ECB's credibility. Draghi is expected to reiterate the improving situation in the financial markets, now accompanied with better business sentiment in Germany, while expressing worries about the situation in the real economies, which is still deep in the woods. Draghi could be pleased with some unwinding of the LTRO seen recently and repeat the forecasts for a recovery in H2 2013. The overall atmosphere is likely to be hopeful, yet cautious. The euro could rise a bit at the end of Draghi's presser. Hints of rate hikes are still far in the future."
BoE:
"Recent data has been very disappointing in the UK, with a drop in GDP and without any sector that could pull the economy forward. The recent drop in the pound reflects this weakness, but isn't enough to allow exporters to benefit in a significant manner. On the other hand, the weaker pound could push prices of imported goods higher, while inflation is still too high. All in all, the BOE is stuck between a rock and a hard place. There is a small chance that the BOE will announce more QE. Mervyn King and his colleagues might want to wait another month in order to assess the complex implications. If QE is announced, a sharp but temporary drop in GBP/USD can be expected. Previous announcements didn't turn into a long-lasting move."
ECB:
"We disagree that the ECB would raise refi rate over the next year and disagree that sufficient liquidity will be removed via tenders to support such a move. So while Euribor reds across 2014, seem reasonably repricing for removal of liquidity and rate risks, Jun13-Dec13 moves seem overdone in our opinion and are likely ripe for some sort of reversal, especially as we move into the ECB on 7 February. The ECB may be questioning the merits and timing of easing, but they are likely to push back on market moves that price in a de facto tightening. The market consensus following the ECB's 7 January meeting was that NO more easing was in store in 2013, based on Mario Draghi's mention that there had been a wide discussion over a rate cut in December. However, we expressed the view at the time that the ECB was done with cutting rates and recent comments by ECB policymakers have since confirmed our view that the ECB will keep rates unchanged in February with another unanimous vote expected!"
BoE:
"Heading into the 7 February meeting, we think that the QE decision will be a V-E-R-Y close one, dependent on the manufacturing PMI on 1 February and particularly the services PMI on 5 February. As long as those indices hold up on average, we think that the BoE will refrain from doing QE and focus on other methods of stimulus instead, perhaps expanding or cheapening the FLS. This is our base case scenario. But if the PMIs disappoint, then we couldn’t rule out another £25bn of QE, with the BoE feeling that it needs to do more on the demand side to keep underlying growth from turning negative again, even if there is a growing debate that QE may not be the best tool at the moment to fix what ails the UK economy. Either way we think that the BoE will decide to reinvest the £6.1bn of its QE holdings maturing in March. The merits of loosening monetary policy may be up for debate, but we do not think the BoE will want to reinforce optics that they are effectively tightening policy as redemptions shrink the outstanding asset purchase program. So even if QE is not expanded, we think that the reinvestment along with some tweaks to the FLS program should be sufficient to satisfy markets that the BoE is still in the game."
ECB:
"I would not expect a rate cut in February as some economic indicators such as Eurozone economic sentiment indicator look slightly better now and financial conditions have significantly improved as a result of lower bond yields in peripheral countries. In fact there's not too much room to cut rates and probably what is needed to do now is to ensure the effectiveness of the monetary policy, increasing the credit level in the real economy and thus helping economic recovery. We can't forget that the Eurozone is still in recession mode, as we have had two successive quarters of negative growth, so an increase in lending should improve GDP figures."
BoE:
"In my opinion, the Bank of England has its hands tied as it has completely lost the ability to implement new measures. Inflation still remains high (2.7% in December 2012) so a rate cut or a new bond purchase program won't help anymore to keep price stability. Therefore maybe the Bank of England should consider a change on its main target and focus on growth and employment instead of inflation; this is something similar to what Bank of Japan has done in January."
ECB:
"At this point, the ECB is quite comfortable with current monetary policy, and I don’t expect a change for this first quarter of the year: confidence in the EU seems to be growing steadily, and unless an unexpected turn there, the ECB will hold steady. "
BoE:
"Is not quite clear what the BOE may do this month. My take is that they will take acknowledge of current drop back and consider a possible extension of facilities, although they won’t change their economic policy this month."
All of the experts contributing to the forecast report agree that the ECB will choose to remain in wait and see mode in February. Even though Mario Draghi was lately pointing out that the situation on European financial markets improved thanks to the measures implemented by the ECB throughout 2012, analysts are deeply skeptical as to whether this already signalizes the end of the crisis.
"The recent developments in the Eurozone showing that the economy might be rebounding could be misleading," warns Adam Narczewski who doesn´t expect rate reductions at the upcoming meeting, although he considers them necessary. Steve Ruffley on the other hand believes that the ECB should remain on hold this month. "Having spent around $1.3bn in LTRO recapitalising the banks and countless billions bailing our Spain and Greece, how much is actually left to further increase any stimulus?", he says.
The general expectation for the Bank of England's rate decision meeting is that of no changes made to the monetary policy, although some of the analysts believe there is a slight possibility of a further expansion of the QE program.
Ahmed Mamdouh suggests that both the interest rate as well as the amount of asset purchases should be left unchanged this month as the BoE "still believes in its FLS program which is the banks' favorite policy tool to bolster credit to households and businesses, especially amid the presence of inflationary concerns." Catherine Stephan adds that the central bank "would wait to know the effectiveness of additional asset purchases before taking up further monetary stimulus."
The BoE and the ECB interest rate decisions will be announced on February 7 at 12:00 and 12:45, respectively. Below you will find the entire comments of the contributing analysts.
Steve Ruffley - Consultant Trading Educator InterTrader.com:
ECB:"The ECB are right to have a 'wait and see' stance on their monetary policy. Having spent around $1.3bn in LTRO recapitalising the banks and countless billions bailing our Spain and Greece, how much is actually left to further increase any stimulus? However lower GDP figures and higher than anticipated unemployment figures are certainly not helping matters. Unlike the US where when the markets slump there seems to be economic data that comes to the rescue, this is simply not happening in Europe. The Euro is strengthening and this will do nothing to improve exports. It is hard to see where the good news is going to come from.
Draghi maintains that the work they have already done in 2012 has improved the debt crisis, but in his heart of hearts he knows, as does the market that there is certainly a long way to go before he can say it is contained. Draghi has been criticised for not doing as much as the US to stimulate growth and for me this a good thing. Once the member states have a solid base they can rebuild. It is not a case of rebounding Spain, Greece and Portugal saw unsustainable rapid growth that was a house build on sand. They need to re build and grow in more controlled manner. The credit, spending and growth these countries saw in the last 20 years will simply never happen again.
I see no unforeseen changes to the monetary policy from the ECB next month, but we will have to read between the lines as to what will happen if the data continues to underperform."
BoE:
"Although the recent GDP figure was disappointing as Dad’s Army Jones’ would say 'Don’t panic!'. Unlike the Euro Zone that is heading for a double dip recession the UK is not looking in relatively good shape. There have been the obvious big events like Jessops, HMV and Block Buster, but you don’t have to be the best economist in the world to see how these out dated companies were way past their sell by date. Apple and the IPhone together with Sky can be single handily be held accountable for the end of all 3 of the companies mentioned. Who prints out pictures, buys or even rents CDs or DVDs anymore?
I think King will keep his rhetoric to the point. There is no need right now to start promising any more drastic stimulus. With his replacement Mark Carney waiting in the wings I think that enough ground work has been done to give the new head of the BOE a fighting chance to finally turn the UK economy around. I would expect to hear a very understated tone from King and the emphasis on looking to the future and not paying too much interest to the recent disappointing figures. Inflation will soon be the key focus as we know growth is going to remain sluggish for the foreseeable future.
I see no easing or stimulus from the BOE."
Clemente De Lucia - Economist at BNP Paribas:
ECB:"At its January meeting, Mr. Draghi acknowledged that the eurozone as a whole is not in good shape. However, the ECB saw (and, according to the last speeches of ECB members of the Council, they continue to see) positive signals throughout survey data, which have bottomed out and are recovering, albeit very gradually and from the reduction of current account deficits and Target2 imbalances. Lastly the Council also esteemed that inflation is still in line with its medium-term target for price stability, which means interest rates are at appropriate levels, at least for the time being.
To sum up, while it is too early to say 'the crisis is over', indicators show that the recovery, although muted, is gaining momentum. It is worth noting, however, that there has been a significant improvement in financial market conditions, but their effects have not yet passed on to the real economy. Therefore, it is too early for any 'exit strategy' or changes of the monetary policy stance which should remain extremely accommodative."
Catherine Stephan - Economist at BNP Paribas:
BoE:"Activity was penalized after the one-off Olympics. Moreover, the BoE would wait to know the effectiveness of additional asset purchases before taking up further monetary stimulus. There won't be any decision at the next BoE meeting."
Ahmed Mamdouh - Economic Analyst at ICN.com:
ECB:"I think that an interest rate cut will not take place during the first quarter, as the situation meanwhile is stable and there is no need for any monetary action. The ECB will probably wait for the most recent economic data from the euro area to get clues about the health of the economy on the macroeconomic level after the significant improvement in the financial markets that appeared clearly in the drop in Spain's bond yields."
BoE:
"The Bank of England will keep both interest rate and amount of asset purchases unchanged in Feb. despite threats of experiencing a triple-dip recession as it still believes in its FLS program which is the banks' favorite policy tool to bolster credit to households and businesses, especially amid the presence of inflationary concerns."
Ilian Yotov - FX Strategist and Founder at AllThingsForex:
ECB:"Euro-area leaders may be optimistic about the prospects of a future recovery, but the current reality is that the euro-zone is in recession and there is a chronic contraction in its manufacturing and services sectors. At its February meeting, the European Central Bank could decide to wait for more data (like the Q4 2012 GDP estimate due on February 14), but if growth remains nowhere to be seen and the EU debt crisis flares up again, it might not be too long too long before we witness additional monetary policy easing, including another rate cut. For the time being, the euro is taking advantage of the market's expectations that the Fed will continue to push the QE pedal to the metal while the European Central Bank sits on the sidelines."
BoE:
"With the U.K. economy contracting in the final quarter of last year and triggering triple-dip recession fears, the odds have risen that the Bank of England may have no other choice but to consider another expansion of its Asset Purchase Program, while maintaining the benchmark interest rate at the record low 0.50%. The pound has come under pressure recently and could head even lower if the market continues to price expectations of more QE by the Bank of England. "
Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:
ECB:"The recent developments in the Eurozone showing that the economy might be rebounding could be misleading. The year ahead of us will be difficult, especially the first half. The ECB still has some bullets it can shoot with – interest rate cuts. I do not expect Mario Draghi to use this weapon at the upcoming meeting though. The recent improvement will make the ECB to stay on hold with further monetary policy changes. I expect some hard times and I would like to see the interest rate cut now, not later. Still, I believe the ECB will wait and any action could expected from it when the situation worsens."
BoE:
"The British economy is struggling and austerity measures could be required. On the other hand the BoE already has done a lot and I do not believe it will act now, or in the upcoming months. I expect some action from the BoE in the second half of the year, when Mark Carney (current Canadian central bank governor) will take the BoE governor’s positions. Actually, the markets are sensing he is the person who will ease monetary policy even further. Markets could be even discounting that scenario as we seen the GBP depreciating since the beginning of the year."
Yohay Elam - Analyst at Forex Crunch:
ECB:"The European Central Bank is not expected to make any change in policy. The previous meeting saw a significant shift from hinting about an upcoming rate cut to a unanimous decision against it. Making another big shift in either direction now could hurt the ECB's credibility. Draghi is expected to reiterate the improving situation in the financial markets, now accompanied with better business sentiment in Germany, while expressing worries about the situation in the real economies, which is still deep in the woods. Draghi could be pleased with some unwinding of the LTRO seen recently and repeat the forecasts for a recovery in H2 2013. The overall atmosphere is likely to be hopeful, yet cautious. The euro could rise a bit at the end of Draghi's presser. Hints of rate hikes are still far in the future."
BoE:
"Recent data has been very disappointing in the UK, with a drop in GDP and without any sector that could pull the economy forward. The recent drop in the pound reflects this weakness, but isn't enough to allow exporters to benefit in a significant manner. On the other hand, the weaker pound could push prices of imported goods higher, while inflation is still too high. All in all, the BOE is stuck between a rock and a hard place. There is a small chance that the BOE will announce more QE. Mervyn King and his colleagues might want to wait another month in order to assess the complex implications. If QE is announced, a sharp but temporary drop in GBP/USD can be expected. Previous announcements didn't turn into a long-lasting move."
Bill Hubard - Chief Economist at Markets.com:
ECB:"We disagree that the ECB would raise refi rate over the next year and disagree that sufficient liquidity will be removed via tenders to support such a move. So while Euribor reds across 2014, seem reasonably repricing for removal of liquidity and rate risks, Jun13-Dec13 moves seem overdone in our opinion and are likely ripe for some sort of reversal, especially as we move into the ECB on 7 February. The ECB may be questioning the merits and timing of easing, but they are likely to push back on market moves that price in a de facto tightening. The market consensus following the ECB's 7 January meeting was that NO more easing was in store in 2013, based on Mario Draghi's mention that there had been a wide discussion over a rate cut in December. However, we expressed the view at the time that the ECB was done with cutting rates and recent comments by ECB policymakers have since confirmed our view that the ECB will keep rates unchanged in February with another unanimous vote expected!"
BoE:
"Heading into the 7 February meeting, we think that the QE decision will be a V-E-R-Y close one, dependent on the manufacturing PMI on 1 February and particularly the services PMI on 5 February. As long as those indices hold up on average, we think that the BoE will refrain from doing QE and focus on other methods of stimulus instead, perhaps expanding or cheapening the FLS. This is our base case scenario. But if the PMIs disappoint, then we couldn’t rule out another £25bn of QE, with the BoE feeling that it needs to do more on the demand side to keep underlying growth from turning negative again, even if there is a growing debate that QE may not be the best tool at the moment to fix what ails the UK economy. Either way we think that the BoE will decide to reinvest the £6.1bn of its QE holdings maturing in March. The merits of loosening monetary policy may be up for debate, but we do not think the BoE will want to reinforce optics that they are effectively tightening policy as redemptions shrink the outstanding asset purchase program. So even if QE is not expanded, we think that the reinvestment along with some tweaks to the FLS program should be sufficient to satisfy markets that the BoE is still in the game."
Alberto Muñoz - Forex Analyst at FXstreet.com:
ECB:"I would not expect a rate cut in February as some economic indicators such as Eurozone economic sentiment indicator look slightly better now and financial conditions have significantly improved as a result of lower bond yields in peripheral countries. In fact there's not too much room to cut rates and probably what is needed to do now is to ensure the effectiveness of the monetary policy, increasing the credit level in the real economy and thus helping economic recovery. We can't forget that the Eurozone is still in recession mode, as we have had two successive quarters of negative growth, so an increase in lending should improve GDP figures."
BoE:
"In my opinion, the Bank of England has its hands tied as it has completely lost the ability to implement new measures. Inflation still remains high (2.7% in December 2012) so a rate cut or a new bond purchase program won't help anymore to keep price stability. Therefore maybe the Bank of England should consider a change on its main target and focus on growth and employment instead of inflation; this is something similar to what Bank of Japan has done in January."
Valeria Bednarik - Chief Analyst with FXstreet.com:
ECB:"At this point, the ECB is quite comfortable with current monetary policy, and I don’t expect a change for this first quarter of the year: confidence in the EU seems to be growing steadily, and unless an unexpected turn there, the ECB will hold steady. "
BoE:
"Is not quite clear what the BOE may do this month. My take is that they will take acknowledge of current drop back and consider a possible extension of facilities, although they won’t change their economic policy this month."
