This week witnessed concerns in Europe in their long journey towards recovery. However, the main focus was on the European central banks interest rate and stimulus decisions amid rising risks surrounding recovery.
In the U.K, Policy makers at the Bank of England (BoE) held their benchmark interest rate at its record low of 0.5% and announced the end of the APF program at 200 billion pounds. Probably the advancement in economic conditions and rise in inflation were the main factors that encouraged the bank to stop at the 200 billion pounds plan.
The economic conditions improved as the economy left the recession in the fourth quarter. However, the vulnerable rebound from recession is casting doubts as the economy grew only by 0.1% in the last fourth of 2009 compared with 0.2% contraction in the third quarter.
The data released this week intensified the volatility; PMI services declined to 54.5 from 56.8 in December, while, on the flip side, PMI manufacturing for January improved to 56.7 from 54.6 a month earlier. Meanwhile, there are concerns that recovery will be sluggish this year.
Inflation, on the other hand, rose to 2.9% in December, close to the 3% set by the bank as an upper bound; in addition, annual PPI output for January underscored woes when it also climbed to 3.8% from 3.5%. Thus, the bank opted to keep the interest rate low to boost growth, but halt the APF till the release of the growth and inflation estimates later on in February.
In the euro zone, the ECB left the interest rate at 1% and decided to exit the 6-month tender after ending the 12-month tender in December. The bank mentioned it will discuss withdrawing other measures in March's meeting, where they start appraising the economic conditions of the economy in the second quarter.
Trichet said the economy will expand at a moderate pace in 2010 and recovery will be uneven. The data in the euro region is also showing volatility as PMI manufacturing final reading for January soared to 52.4 from 51.6 in December, while PMI services for January retreated to 52.5 from 53.6 in December.
The President of the ECB talked about the economic conditions in the region and expectations about the outlook of the euro area. However, eyes were on the Greek deficit and plan amid the undergoing debt concerns in Europe. Trichet announced that budget deficit in European economies will rise this year, where it might be near 6% of GDP in 2010, according to the IMF expectations.
With regard to Greece, Trichet expressed his confidence about Greece's ability to reduce the deficit after the decisions made this week by the Greek government to freeze public sector wages and overhaul the pension system, which were approved by the EU Commission.
EU policy makers mentioned that there is no plan from the union to salvage the Greek economy from its budget deficit woes. Greek bonds slipped to be the worst performing in January after speculations that Greece will need a bailout from the EU. The Greek Prime Minister George Papandreou said the situation is worsening due to the ongoing rumors.
Papandreou revealed that no new stimulus measures will be planned to lower the deficit that remained at 12.7% of last year's GDP. Worries in Greece and Portugal caused the cost of insuring to cover losses on economies budget deficits to hit a record. Also, the tumble in bonds of Portugal, Spain and Hungary sparked concerns further this week.
Hence, the bank will be a challenging task this year to rein in budget deficit at the same time boosting recovery that is still fragile.
