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FX central bank previews: BoE, ECB, SNB and DN

Wed, Nov 5 2008, 17:09 GMT
by Kasper Kirkegaard, John Hydeskov

Danske Bank A/S


Thursday will be a busy day for central bank watchers: We have pencilled in rate cuts from the Bank of England (BoE), the European Central Bank (ECB) - each of 50bp - and we expect Danmarks Nationalbank (DN) to follow the ECB and lower rates by the same magnitude. Risk of an intermeeting cut from the Swiss National Bank (SNB) has risen.

We expect the Bank of England (BoE) to cut the base rate by 50bp to 4.00% on Thursday 13.00CET. Even though CPI inflation remains skyhigh at 5.2%, price concerns have lost their importance as economic conditions have deteriorated extremely fast. We believe the UK is in recession and will probably remain there into 2010. Stimulation is very much required and there are rumblings that the BoE might be 'behind the curve'.

Our expectation of 'just' a 50bp cut relies on three factors: 1) Even though the MPC's hawks have been muzzled, inflation concerns are not dead and buried. Large rate cuts can push current inflation higher and lead to persistently higher inflation expectations with negative and undesirable long-term consequences. 2) Every central bank wants monetary policy to contribute to stability - not the opposite. After having cut rates aggressively, the RBA had to stabilise the AUD - something that might have been avoided if the RBA had lowered rates more gently. 3) Since the BoE became independent, it has never lowered (or raised) the base rate by more than 50bp. One has to go all the way back to 1993 to see more aggressive easing.

Published on  Wed, Nov 5 2008, 17:15 GMT


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