Thursday has announcements from the ECB and BOE on monetary policy. We do not expect moves from either bank in interest rate levels or calls for additional non-standard measures or QE.
Although the ECB does need to cut its main interest rate as the region is dragged into recession, we’ll likely see Draghi remain on hold due to the timing of the 2nd 36 month LTRO (€529.5 billion) just last week and given that there’s plenty of runway left in 2012 to cut off the 1.00% bound. Another gauge that may weigh on inaction is the improvement in the EURIBOR-OIS spread, down 40% year-to-date to 58bps. However, as the chart below shows, a fair amount of the LTRO’s credit may be flowing to safety in the ECB’s overnight deposit facility (which is hitting new highs), and not to its intended audience of corporates and personal loans.
Remember, Draghi revised the language on the main outlook on the Eurozone economy in the last meeting (on 2/9) to “tentative signs of stabilization in economic activity at a low level” versus “substantial downside risks” in the previous report. We could see a return to his previous language.
Recent data since the last meeting that will weigh on the decision, and collectively hasn’t shown “tentative signs of stabilization”, includes:
Eurozone Q4 GDP -0.3% Q/Q vs 0.1% in Q4 2011
Eurozone M3 2.5% JAN Y/Y (exp. 1.8%) vs 1.6% DEC
Eurozone Unemployment Rate 10.7% JAN vs 10.6% DEC (highest since ‘97)
Eurozone CPI Y/Y 2.7% FEB (exp. 2.6%) vs 2.7% JAN
Eurozone PPI 3.7% JAN Y/Y (exp. 3.5%) vs 4.3% DEC [0.7% JAN M/M (exp. 0.5%) vs -0.2% DEC]
Eurozone Retail Sales 0.0% JAN Y/Y vs -1.3% DEC [0.3% JAN M/M vs -0.5%]
Eurozone PMI Manufacturing 49 FEB vs 48.8 JAN
Eurozone PMI Services 48.8 FEB vs 50.4 JAN
Eurozone Business Climate Indicator -0.18 FEB vs -0.21 JAN
Eurozone Consumer Confidence -20.3 FEB Final vs -20.7 JAN
Eurozone Economic Confidence 94.4 FEB (exp. 94) vs 93.4 JAN
Eurozone Industrial Confidence -5.8 FEB (exp. -6.9) vs -7 JAN
Eurozone Services Confidence -0.9 FEB (exp. -0.6) vs -0.7 JAN
The BOE should also maintain its 0.50% benchmark rate and £325 Billion bond purchasing program, following a £50 Billion increase last month. Fundamental data hasn’t shown signs of material improvement, though improvement on the margin, but again, there’s a lot of runway left in 2012 for monetary policy and still much uncertainty surrounding the direction of the Eurozone, the UK’s main trading partner.
In the last meeting, David Miles and Adam Posen pushed for £75 Billion in stimulus, and looser monetary policy, so we’ll have to wait for the minutes to see if the two had any more influence on the committee.
Recent data weighing on the decision includes:
UK Q4 GDP -0.2% Q/Q vs 0.6% in Q4 2011
UK CPI 3.6% JAN Y/Y (exp. 3.6%) vs 4.2% DEC
UK PPI Output 4.1% JAN Y/Y (exp. 3.7%) vs 4.8% DEC
UK PPI Input 7.0% JAN Y/Y (exp. 6.8%) vs 8.9% DEC
UK RPI 3.9% JAN Y/Y (exp. 4.1) vs 4.8% DEC
UK ILO Unemployment Rate 8.4% DEC vs 8.4% NOV
UK Jobless Claims Chg 6.9K JAN (exp. 3K) vs 1.9K
UK Avg Wkly Earnings 2.0% DEC Y/Y vs 1.9% NOV
UK Net Consumer Credit 0.1 B GBP JAN vs 0.0B GBP DEC
UK Mortgage Approvals 58.7K JAN vs 55K DEC
UK M4 Money Supply -1.8% JAN Y/Y vs -2.5% DEC
UK Nationwide House Prices 0.9% FEB Y/Y (exp. 0.3%) vs 0.6% JAN
UK PMI Manufacturing 51.2 FEB vs 52.0 JAN
UK PMI Services 53.8 FEB vs 56.0 JAN
UK PMI Construction 54.3 FEB (exp. 51.3) vs 51.4 JAN