Bank of England stands pat, as expected
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The European Central Bank left key interest rates unchanged Thursday, as expected, leaving the stage to Mario Draghi, who isn’t expected to deliver any early Christmas gifts as policy makers take a wait-and-see stance on the economy and the debt crisis.
The ECB said it left its key lending rate at a record low 0.75%, while the deposit rate paid on money parked overnight at the institution was held at 0%.
The euro EURUSD +0.04% traded at $1.3064, down 0.1% from Wednesday and up marginally from around $1.3056 ahead of the announcement.
Draghi, the ECB president, will hold his monthly news conference at 2:30 p.m. local time, or 8:30 a.m. Eastern.
While recent survey data indicate the pace of the region’s economic contraction is easing, the region’s recession is expected to have deepened in the current quarter, economists said.
Spanish, Italian and other peripheral euro-zone government bond yields remain in a downtrend, even though the ECB has yet to activate its aggressive bond-buying program, known as outright monetary transactions. Meanwhile, PMI data released this week indicated that the pace of contraction in private-sector output at least slowed in November.
“Draghi may be in no rush to cut rates when there are some signs that the economic outlook is starting to pick up. Instead the ECB may prefer to save some ammunition to use if and when the economic outlook deteriorates further or if the sovereign debt crisis flares up again in the New Year,” said Kathleen Brooks, research director at Forex.com.
But investors will focus on changes to the ECB’s staff projections on the economic outlook.
“A sharp downgrade may undermine risk appetite, sending shares and other cycle-sensitive assets lower. The result may also weigh on the euro as traders begin to ponder the possibility of rate cuts and other stimulus in the year ahead,” said Ilya Spivak, currency strategist at DailyFX.
Earlier Thursday, the Bank of England stuck to the sidelines as expected, leaving its key lending rate unchanged at a record low and keeping its quantitative-easing program on pause. The central bank said the Monetary Policy Committee voted to hold its key lending rate at 0.5%, where it’s stood since March 2009. The bank also made no changes to its 375 billion pound ($604 billion) program of asset purchases.
The British pound GBPUSD +0.13% traded at $1.6110, up 0.1% from Wednesday but little changed from its level ahead of the announcement.
Remarks by Bank of England Governor Mervyn King and the tone of the committee’s November quarterly inflation report made it clear the central bank was unlikely to take any action at its December meeting.
In fact, little has changed since the November MPC meeting, noted Annalisa Piazza, an economist at Newedge, ahead of Thursday’s decision.
“The inflation rate continued to creep higher due to energy prices and tuition fees in October. On the other hand, the solid upswing in [third-quarter] GDP has been offset by some sluggish survey indicators,” she said, in a note.
Past resilience in the U.K. labor market has corrected after a summer boost partially attributed to the London Olympics, she noted, while policy makers have also signaled that the picture for the current quarter isn’t very rosy.
“The weak economic scenario might be seen as a possible factor behind the decision for further QE in the coming months. However, King expressed some caution on how monetary policy can affect the development of activity near term,” Piazza said.
That means no action is likely in the next month or so, although the MPC is likely to remain “vigilant” and ready to act if needed in the future, she said.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Follow him on Twitter @wlwatts.
