ECB February meeting to lay ground for rate cut; BoE could clarify forward guidance


The upcoming ECB monetary policy meeting most probably won't bring a rate cut yet and Mario Draghi is rather expected to prepare ground for further action. The BoE will keep rates on hold while Mark Carney tries to clarify the central bank's forward guidance policy.

ECB

The ECB is generally expected to hold rates in February, leaving however the door open to further easing “because of the deflation threat and the unemployment rate which remains stuck near record highs” as Ilian Yotov comments. Clemente de Lucia, who suggests that “the December inflation decrease might prove to be short lived, as it was due mainly to methodological changes adopted by the German Statics Office,” still believes that new measures could be announced shortly, in the face of the sluggish recovery in the Eurozone.

The majority of analysts polled for the forecast report predict that cuts of the repo and/or deposit rates could take place as soon as March. Meanwhile, at the upcoming meeting Draghi will most probably offer a “highly dovish guidance on policy, as the Bank looks to attempt to decouple Eurozone interest rates from ongoing Fed tapering,” in the opinion of Alistair Cotton.

Such a statement would “increase the pressure on the single currency,” Ilian Yotov predicts, adding however that “at this point it seems that we might witness the euro testing $1.40 before we see it falling below $1.30.”

The Bank of England is expected to introduce adjustments to its forward guidance policy, in the light of the fact that the unemployment rate has fallen unexpectedly rapidly towards the central bank's 7% threshold. This steep fall “has sent speculators to price in a rate hike sooner than later, which the BoE is not ready to deliver,” as Valeria Bednarik points out and governor Mark Carney will continue trying to “correct market expectations on upcoming economic policies.”

Nevertheless, this might not happen before the publication of the Inflation Report on February 12. Meanwhile, Alberto Muñoz expects the pound to rally at the February meeting “no matter what they say as the market is definitely bullish on UK economy.”

The BoE and the ECB will announce their monetary policy decisions on February 6 at 12:00 and 12:45 GMT, respectively. Below you will find the full forecasts of the contributing economists.

Alistair Cotton - Head of Corporate Dealing at Currencies Direct:

AlistairCottonECB:
"The ECB suggested the drop in Eurozone inflation last month to a post-crisis low of 0.7% was due to temporary factors and their tone hinted they were fairly confident in that prediction. That suggests they will keep policy on hold this month and assess price levels over the coming quarter before committing to another rate cut. What we can expect is further highly dovish guidance on policy, as the Bank looks to attempt to decouple Eurozone interest rates from ongoing Fed tapering."
 
BoE:
"The Bank of England is furiously trying to change the interpretation the market previously had of forward guidance and it is highly likely an official moving of the goal posts will be confirmed at next week’s MPC meeting. As Bank governor Mark Carney suggested, the bank’s failed prediction on unemployment is more acceptable when it shows the economy growing at a much faster rate than originally forecast. Whether the MPC would be given the necessary political wiggle room had unemployment remained stubbornly high is very debatable."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

Ilian YotovECB:
"The euro has been quite resilient against the greenback despite the European Central Bank's benchmark rate cut to a new record low last year and despite of the Fed's decision to start tapering. Although a rate cut in February is not a likely option, the ECB policy makers would probably keep the door open to more easing because of the deflation threat and the unemployment rate which remains stuck near record highs. A dovish ECB statement and outlook could increase the pressure on the single currency, but at this point it seems that we might witness the euro testing $1.40 before we see it falling below $1.30."  

BoE:
"With the U.K. unemployment rate at 7.1% and only 0.1% from the Bank of England's 7% threshold, it would not be surprising to see policy makers considering some sort of an adjustment to their forward guidance. Such decision might not come until the central bank's Inflation Report which is due on February 12 and it would probably consist of a similar announcement to the Fed's 'significantly below 6.5%' statement. The world's major central banks keep reassuring the markets that their policies will remain accommodative and the Bank of England will not be an exception. However, because of the U.K. recovery outpacing other developed economies, the Bank of England's stance will remain 'neutrally-hawkish' with a potential to start monetary policy tightening sooner than their peers. As long as the Bank of England doesn't change its monetary policy course and the U.K. economic data continues to impress, the pound will remain attractive."

Clemente De Lucia - Economist at BNP Paribas:

Clemente de Lucia

ECB:
"Eurozone inflation is alarmingly low. A negative shock might switch inflation from a disinflationary toward a deflationary path. However, the December inflation decrease might prove to be short lived, as it was due mainly to methodological changes adopted by the German Statics Office. A rebound is likely as soon as in January. Against a backdrop of slightly higher rate of inflation and improved confidence, the ECB is unlikely to adopt any new measure in February. Yet, doors are open to further actions. The pace of the recovery is low and inflation is far from the ECB’s inflation target for price stability (an inflation rate close but below 2%). In addition, the decline of excess liquidity in the money market is adding some upward pressures on the Eonia, which is equivalent to a tightening of monetary conditions, exactly the opposite of what the ECB wants: an accommodating monetary policy aiming at supporting  the recovery. Probably the March meeting, when the ECB will present its new inflation and growth projections, will be the right occasion to announce new actions."

Steve Ruffley - Chief Market Strategist at InterTrader.com:

Steve Ruffley ECB:
"The ECB find themselves in the same situation as the US of having the problem of too low inflation. This will be Yellen’s first take in office to help raise the rate back to the 2% target. So what do this mean for the ECB and Mario Draghi? For me personally it means he will wait and see what the US do, it’s been his style since he came to office to FED follow and hint and many ‘possible’ scenarios but in reality ends up doing a watered down version of the US's polices.

The ECB although well used to missing targets like that of inflation have more pressing matters. Although every economist out there is talking up the Euro Zone’s situation and the making noises the recession is long gone, I don’t see it. I still have to remind readers that the world and more importantly the EU’s employment woes. 12.1% of the EU labour force is out of work. Nearly 22% is 18-24 years old. Spain is running around the mark of 27% unemployment Greece towards 27%, We only get to reasonable figures in the EU for Sweden and that is still high at around8 %. Does this spell out long term recovery chances? Inflation for the ECB will not be a key concern this time around."

BoE:
"I think there may be riots in London if Mark Carney does not clarify his stance on rates. After, I can ensure you, immediately regretting linking rate talks with unemployment, as these target are magnetically pulling their target people want answers. By people I mean both the general public and the people that move the money markets of the world!

There is the real risk of a new housing bubble in the UK. With cheap money people are remaining to over inflate house prices and the majority of growth we have seen in the UK has been form consumer spending. People once again forgetting the lessons of 6 years ago and spending equity in their houses and borrowing cheap money. Interest rates, and the increase of rates will be the only thing to cool the housing market and to start to make people pay down their inevitable debt burdens. Carney need to make his statement clear and unambiguous, if that is possible, otherwise the markets will demand blood."

Ahmad Mamdouh - Analyst at ICN.com:

Ahmad MamdouhECB:
"I think the ECB will remain committed to its guidance by holding interest rate in February amid signs of infant economic recovery. The Governing Council believes there are no deflationary concerns, where in case there are some threats the ECB may use other tools such as buying packages of bank loans and companies."

Ahmad Sweiss - Analyst at ICN.com:

Ahmad SweissBoE:
"Carney’s guidance seems to be jeopardized by a recent dip in inflation and unemployment rates to about the Bank’s official targets after only six months of its debut, but we like to believe that the emergency setting of monetary policy; keeping interest rates at record low and asset purchases at a size of 375 billion, will not be offset any time soon, as the recovery takes hold in the UK against the cost-of-living crisis. Fourth quarter growth was slower than in the third, growth is still 1.3% below the pre-recession peak, thus the recovery needs to be more balanced into 2014 for policymakers to put a possible rate hike back on the table, if inflation turns to be less stubborn above its target."

Bill Hubard - Chief Economist at Markets.com:  

Bill HubardECB:
"ECB President ‘Magic’ Mario told business and political leaders in Davos on 25 January that the central bank will act if it sees an unwarranted rise in money-market rates, which can influence loan costs for companies and households. While banks including Royal Bank of Canada, Commerzbank AG, and Markets.com are predicting the ECB will cut its official rates by March, ECB Governing Council member Klaas Knot signaled that assumption is premature. The key to any action will be the Governing Council’s interpretation of the 'unwarranted tightening' that Draghi said would be one reason to ease policy. It also begs the question of what tools would be best suited to the task, with options ranging from rate cuts to long-term loans. 'We are ready and willing to act if needed,' Draghi said at Davos, where attendees included fellow central-bank heads Christian Noyer of the Bank of France, Jens Weidmann of the Bundesbank, Mark Carney of the Bank of England and Haruhiko Kuroda of the Bank of Japan. Officials are considering 'all the instruments that our treaty allows,' Draghi said.

Markets.com feel the ECB’s key rate will fall to 0.1% and the deposit rate, which is currently at zero, to -0.1% by March. Liquidity in the financial system has fallen as banks return the emergency 3-year loans they took from the central bank in 2011 and 2012. The ECB’s balance sheet has shrunk to €2.2 trillion from a high of € 3.1 trillion in 2012. Excess liquidity has dropped to €161bn from €813bn. Last week, overnight EONIA traded above the ECB's main refinancing rates (MRO), now 0.25%, for 4 sessions in a row. Swaps markets now imply a 16% probability of annual Eurozone inflation below 0.0% in October 2014. Markets.com does not think anybody has full-blown deflation as their central economic scenario for 2014!!! Higher market rates could hamper the Eurozone economy's nascent recovery, and the ECB has said it is ready to ease further, if needed."

BoE:
"Under guidance, the BoE said it wouldn’t consider raising its benchmark rate from 0.5% at least until unemployment declined to 7.0% While Britain’s economy is improving and the jobless rate has dropped to 7.1%, Carney cited low inflation pressures, headwinds such as high consumer and government debt and the threat to exports from the pound’s strength as reasons to keep policy loose. The governor said that once the threshold is reached, the MPC will 'assess the prevailing economic conditions, including wider measures of slack and inflationary pressures, before deciding the appropriate stance for monetary policy.' Carney said that when the BoE does begin tightening, any moves will be 'gradual.' Borrowing costs in the medium term may not return to levels seen prior to the financial crisis in 2008, he said. Markets.com feels that the BoE/MPC will do NOTHING at next week’s meeting, BUT that the MPC will lower the jobless threshold when Carney publishes the quarterly Inflation Report and new economic forecasts on 12 February.

We expect the MPC will gradually lift the policy rate to 2.0% (i.e. zero real rates) by late-2015, still leaving policy supportive for growth."

Yohay Elam - Analyst at Forex Crunch:

Yohay ElamECB:
"The ECB will likely leave its policy unchanged, but could certainly set the ground for a negative deposit rate in March. Inflation continues to fall in Germany and in the Eurozone. It will be harder for Draghi and co. to deny the danger of deflation, and it will be harder to wave with a negative deposit rate and not use it eventually. In the press conference, he could use words to hint an imminent cut of both the main lending rate and the deposit rate in March, and this would hurt the euro."

BoE:
"The Bank of England will probably leave QE and the interest rate unchanged as usual. Carney repeats the message that the rate will remain low even after the 7% unemployment rate will be achieved, and his task became easier as inflation is within the target. The February inflation report will probably remain unchanged, but a change could come in the May report."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

Adam Narczewski ECB:
"The ECB can no longer wait with some moves but I do not believe it will happen in February. The Eurozone requires further monetary policy easing in order to rebound. Mario Draghi can no longer ignore the situation. So I do expect the refinancing rate to be cut (not the depo rate!) but in March."

BoE:
"The rebound of the UK economy is steady and I do not see a reason that Mark Carney will make any sudden moves. I expect that the known forward guidance will be kept. The British economy is at a different level now than the U.S or Eurozone and the Bank of England can wait and see how the situation evolves."

Valeria Bednarik - Chief Analyst at FXStreet:

ECB:
"There is some market talk about a probable rate cut both in repo, and deposit rates coming from ECB next week, but I do believe chances are quite limited for this meeting. Despite the high risk of deflation the EU is suffering, I would expect Mr. Draghi to give data a couple months to improve, before taking such decision, as I do see a major EUR sell-off on a rate cut, and the world has enough instability at the time being, for Europe to add more. Nevertheless, I don't see how he can favor the common currency this month, as more stimulus added will be seen as continued trouble in the area, while a rate cut may be chaotic. I do see the EUR losing ground with the meeting, and if something, the best chance for the currency is an on hold stance."

BoE:
"Mark Carney has been trying really hard to correct market expectations on upcoming economic policies, with little success so far. The dramatic fall in unemployment near the Central Bank threshold of 7.0%, has sent speculators to price in a rate hike sooner than later, which the BOE is not ready to deliver: I believe governor Carney will have to come with another version of its forward guidance, if he wants the message to reach markets. In that case, I would expect Pound to suffer a set back, more over if dollar recent strength continues."

Alberto Muñoz, Ph.D. - Forex Analyst at FXstreet:

Alberto Muñoz ECB:
"Currently I think that the Eurozone is in a disinflation situation, which means that inflation is lower than a year ago but prices are still increasing. Therefore I don't expect the ECB to do anything but wait and watch if inflation picks up in the next months, though I'm sure Mr. Draghi is watching closely the inflation figures as he's ready to act below a predefined level. Otherwise, if the Eurozone falls into deflation territory, it would worsen the situation for those countries highly-indebted such as Spain, Portugal and Greece, where the rates of inflation are indeed below the Eurozone average."

BoE:
"It's very likely that the Bank of England will update its forward guidance on interest rates as a response to a much faster-than-expected drop in the unemployment rate, as Mark Carney has suggested to some business executives in Davos. That probably means that the Old Lady is ready to act but it won't happen in the immediate future as Carney clarified that an unemployment rate below 7% is not a trigger for a rate hike. Otherwise, if the BoE was to remove the extraordinary monetary policy measures, the incipient GDP recovery would be drowned. In any case, I expect the Pound to rally after BoE meeting, no matter what they say as the market is definitely bullish on UK economy. "

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