Today the BoE and the ECB members will meet to set the interest rate for October, where expectations are in favor of leaving the benchmark at its current low level. Since October last year, BoE and ECB started slashing their borrowing cost to revive their economies that suffered tremendously from the global downturn that hit world economies in 2008.
With regard to the BoE, policy makers in September opted to keep their benchmark interest rate at its record low of 0.5% and continuing their 175 billion pounds bonds purchase plan. The BoE already embarked on methods of quantitative easing to accelerate the recovery process through supporting markets with the suitable amount of liquidity needed to spur lending, and thereby spending and consumption.
In August, there has been an argument with regard expanding the program. The majority voted for increasing the program with 50 billion pounds. They mentioned that raising the program over the 50 billion pounds should be joined with a similar decrease in borrowing cost to keep the inflation rate within the target, while the minority, including King, asserted that there should be expansion to the program as the risks coupled with the increase is lower than spending less. Last month King agreed with the consensus on leaving the APF program at 175 billion pounds.
The British economy contracted 0.6% in the second quarter compared with the first quarter's contraction of 2.4%. The IMF in September's forecasts estimated that the U.K. economy will contract 4.4% in the current year and growing 0.9% next year. However, signs of recovery emerged since April till the current date. Services in September surged to its highest level in 2 years and confidence rose to an 18-month high.
Meanwhile there are talks that the BoE might raise the APF program to 200 billion pounds as the economy is still in a need of another boost as economic data is inconsistent and inflation rate is below the target. CPI for September dropped to 1.6%, indicating that there are still deflation risks and that the rate might remain below the 2% target for longer period. King projects that the inflation rate will remain 1% this year and before returning to the target by the end of 2012.
Moving to the ECB, the economy had shown improvement since the second quarter as contraction eased to 0.2% from 2.5% in the first 3 months of the year. Germany and France, the twol argest economies in the Euro Zone, grew unexpectedly (0.3%) in the second quarter for the first time since the beginning of the recession after the wise monetary intervention by the ECB. Trichet and his economic team cut the key interest rate to a historical low and launched a 60 billion euros plan on July 7 to rekindle growth.
Despite the improvement witnessed soon and the vivid recovery signs, the ECB is expected to keep the rate unchanged this month. It seems that raising the interest rate may take place after the release of the third quarter's GDP which is estimated to show positive growth figures. PMI services spiked to the highest in 16 months and confidence inclined to one-year high in September, adding to signs the worst is over.
Nevertheless, the inflation rate is still low; consumer prices will surge to -0.3% in September as seen by the CPI flash estimate released last week. In August, the annual rate of inflation slipped to -0.2% from -0.7%, the worst record since in 1996. However, the rate may fluctuate in the coming period before it reaches stability. The ECB expects inflation to reach 0.4% in 2009 and 1.2% in 2010.
The IMF estimated in September that euro region will shrink 4.4% this year and expand 0.9% in 2010. Also, it announced that central banks around the world should their interest rates at their low rates and not to withdraw their stimulus packages as recovery is expected to be slow and economies are still in a need of intervention.
With regard to the BoE, policy makers in September opted to keep their benchmark interest rate at its record low of 0.5% and continuing their 175 billion pounds bonds purchase plan. The BoE already embarked on methods of quantitative easing to accelerate the recovery process through supporting markets with the suitable amount of liquidity needed to spur lending, and thereby spending and consumption.
In August, there has been an argument with regard expanding the program. The majority voted for increasing the program with 50 billion pounds. They mentioned that raising the program over the 50 billion pounds should be joined with a similar decrease in borrowing cost to keep the inflation rate within the target, while the minority, including King, asserted that there should be expansion to the program as the risks coupled with the increase is lower than spending less. Last month King agreed with the consensus on leaving the APF program at 175 billion pounds.
The British economy contracted 0.6% in the second quarter compared with the first quarter's contraction of 2.4%. The IMF in September's forecasts estimated that the U.K. economy will contract 4.4% in the current year and growing 0.9% next year. However, signs of recovery emerged since April till the current date. Services in September surged to its highest level in 2 years and confidence rose to an 18-month high.
Meanwhile there are talks that the BoE might raise the APF program to 200 billion pounds as the economy is still in a need of another boost as economic data is inconsistent and inflation rate is below the target. CPI for September dropped to 1.6%, indicating that there are still deflation risks and that the rate might remain below the 2% target for longer period. King projects that the inflation rate will remain 1% this year and before returning to the target by the end of 2012.
Moving to the ECB, the economy had shown improvement since the second quarter as contraction eased to 0.2% from 2.5% in the first 3 months of the year. Germany and France, the twol argest economies in the Euro Zone, grew unexpectedly (0.3%) in the second quarter for the first time since the beginning of the recession after the wise monetary intervention by the ECB. Trichet and his economic team cut the key interest rate to a historical low and launched a 60 billion euros plan on July 7 to rekindle growth.
Despite the improvement witnessed soon and the vivid recovery signs, the ECB is expected to keep the rate unchanged this month. It seems that raising the interest rate may take place after the release of the third quarter's GDP which is estimated to show positive growth figures. PMI services spiked to the highest in 16 months and confidence inclined to one-year high in September, adding to signs the worst is over.
Nevertheless, the inflation rate is still low; consumer prices will surge to -0.3% in September as seen by the CPI flash estimate released last week. In August, the annual rate of inflation slipped to -0.2% from -0.7%, the worst record since in 1996. However, the rate may fluctuate in the coming period before it reaches stability. The ECB expects inflation to reach 0.4% in 2009 and 1.2% in 2010.
The IMF estimated in September that euro region will shrink 4.4% this year and expand 0.9% in 2010. Also, it announced that central banks around the world should their interest rates at their low rates and not to withdraw their stimulus packages as recovery is expected to be slow and economies are still in a need of intervention.
