Expectations grow for additional easing by Bank of England
By William L. Watts, MarketWatch
LONDON (MarketWatch) — The European Central Bank and the Bank of England offered no surprises Thursday, deciding to leave monetary policy unchanged.
But investors are expected to pay close attention to ECB President Jean-Claude Trichet’s monthly news conference at 8:30 a.m. Eastern time. They’re also likely to closely examine the minutes from the meeting of the Bank of England’s Monetary Policy Committee due later this month.
The British pound (GBPUSD 1.5960, +0.0072, +0.4532%) extended gains against the U.S. dollar to trade as high as $1.6018, its highest level in eight months. It changed hands in recent action at $1.6001, a gain of 0.9% on the day.
The euro hit a new eight-month high versus the broadly weaker dollar ahead of the ECB’s policy announcement and changed hands in recent action at $1.3989, a gain of 0.5%.
At his news conference, Trichet will likely face questions over sovereign debt issued by peripheral euro-zone countries, namely Ireland, and rising currency tensions.
Julian Callow, chief European economist at Barclays Capital, said there are unlikely to be any major surprises. The European Central Bank last month set out its plan to continue providing a range of special liquidity measures into the end of the year, saving future decisions on its exit plan for its December meeting, he said.
“While in general there is quite a strong principle at the ECB for sticking to a pre-defined course once that has been agreed, at the same time Mr. Trichet is likely to focus on the uncertainties and challenges that lie ahead, and therefore also to stress that the ECB’s policy continues to be flexible, pragmatic, cautious, prudent and, above all, focused on maintaining confidence,” Callow said.
The euro, meanwhile, has jumped against the dollar and other currencies in recent weeks, as the European Central Bank has stayed out of the push toward further quantitative easing.
“The EUR/USD move over the past four months has rarely been equaled during the euro’s lifetime in terms of pace,” wrote strategists at FxPro. “However, on balance, Trichet is more likely to avoid any indication of unease on the currency given the limited resources at his disposal to do much about it. More key will be meetings this weekend in Washington between [Group of Seven] finance ministers around the IMF meetings.” Read about the upcoming IMF meeting.
Will the BOE ease policy further?
The Bank of England’s minutes are expected by many economists to show a three-way split on the nine-member panel. Andrew Sentance is expected to have maintained his call to hike the lending rate by a quarter of a percentage point, after reiterating his contention that persistently above-target inflation and signs of growth warrant slowly withdrawing monetary stimulus.
At the same time, the minutes are expected to show that Adam Posen urged an expansion of the bank’s asset purchases -- the centerpiece of its quantitative-easing program. Posen last month delivered a speech arguing there was a “clear” case for additional easing in order to fend off a prolonged, Japan-style struggle with slow economic growth.
“It is likely that most MPC members preferred to wait and see the third-quarter GDP [gross domestic product] figures that are out later this month and the details of the comprehensive spending review (on 20 October) before possibly changing tack on monetary policy,” said Howard Archer, chief U.K. and European economist at IHS Global Insight.
The data on gross domestic product will provide a guide to how much momentum the economy has lost after a second-quarter spike in growth, while the government’s spending review will signal the scope of the upcoming fiscal squeeze, he said.
Minutes of the MPC’s September meeting showed signs of increased concern about the sustainability of the U.K. recovery. But MPC members are also wrestling with inflation rates that have remained stubbornly above target. August annual consumer price inflation was at 3.1%, above the bank’s 2% target.
The debate comes as the U.S. Federal Reserve is expected to undertake a new round of quantitative easing as early as next month. The Bank of Japan earlier this week took its own additional measures.
Quantitative easing is a strategy designed to fend off deflation. Central banks effectively create new money via reserves that are used to purchase assets such as government bonds.
