By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The Bank of England stuck to its course Thursday as it attempts to jump-start a U.K. economy mired in a double-dip recession, leaving investors focused on the outcome of the European Central Bank’s policy meeting after its president pledged the institution would do everything within its mandate to save the euro.
The Bank of England, as expected, said its Monetary Policy Committee voted to leave the key lending rate at a record-low 0.5%. The MPC also voted not to alter the plan initiated last month to increase the size of its stock of asset purchases to 375 billion pounds ($583 billion) from ÂŁ325 billion.
The central bank, which raised the size of its asset-buying program by 50 billion pounds last month, said it expects purchases to take another three months to complete. “The scale of the program will be kept under review,” the bank said. Minutes of the August policy meeting will be released on Aug. 15.
The bank’s Funding for Lending program, aimed at boosting bank lending to the real economy, just got under way. Economists said the Bank of England is likely to want to see the current bond purchases run their course and to gauge the impact of the new lending program before taking additional steps.
“We do not expect any further policy changes until the November MPC meeting at the earliest. Even then, we suspect it would be an expansion of QE over an interest-rate cut,” said James Knightley, economist at ING.
The British pound GBPUSD +0.3471% traded at $1.5564, up 0.1% on the U.S. currency unit but little changed from around $1.5555 just ahead of the announcement.
Economists, meanwhile, are divided over the outcome of the European Central Bank’s policy meeting. Few expect the central bank to announce any changes to interest rates at 1:45 p.m. Frankfurt time, or 7:45 a.m. Eastern, after having last month reduced its key refinancing rate by a quarter of a percentage point, to 0.75%.
The focus is on ECB President Mario Draghi’s news conference at 8:30 a.m. Eastern.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” Draghi said at an investment conference in London last week.
The remarks triggered a global rally in equities, while prices for Spanish and Italian government bond rose as their yields tumbled.
Many economists expect the European Central Bank to announce a resumption of government bond purchases under its controversial Securities Market Program, despite objections by Germany’s Bundesbank.
Others contend that both a lack of faith in the efficacy of such bond purchases and stiff opposition by Germany will prompt Draghi to attempt to lay groundwork for bolder action later, risking a selloff.
“The ECB promised, now markets expect it to deliver. If it doesn’t, then we can expect yields in Italy and Spain to move higher and the single currency to take a hit,” said Simon Smith, chief economist at FxPro in London.
German daily Sueddeutsche Zeitung reported Thursday that the European Central Bank’s planning to undertake coordinated action with the European Stability Mechanism, the euro-zone’s permanent rescue fund, to buy Spanish and Italian government bonds. A final decision, however, wouldn’t come until September, when Germany’s Constitutional Court is scheduled to rule on challenges to German participation in the fund.
If so, Draghi may be unable to offer much if any detail of the plan on Thursday, analysts said.
Also, the Bundesbank has made clear its opposition to renewed ECB bond purchases. The Bundesbank fears such moves skirt too close to financing of government deficits, potentially overstepping the bounds of the European Central Bank’s narrow, inflation-fighting mandate and threatening its independence.
Even if the ECB’s 23-member Governing Council defies the Bundesbank and agrees to announce a relaunch of the bond-buying program, the impact on markets is likely to be limited, strategists said.
That is because the European Central Bank’s decision to not participate in the restructuring of Greek government debt raises fears that any future restructuring of Spanish government debt would see private bondholders subordinated once again, strategists said.
In other words, the more bonds the central bank buys, the bigger the hit that private bondholders would potentially take in the event of a restructuring.
Economists say Draghi could potentially deliver another long-term refinancing operation or other measures aimed at boosting the region’s banking sector. An easing of collateral rules would make it easier for banks to get access to ECB liquidity loans.
Overall, the market focus is likely to remain on the possibility of issuing a banking license to the European Stability Mechanism, wrote strategists at Lloyds Bank. That would give the fund access to ECB loans, boosting its firepower well beyond its 500 billion euro cash pot.
Draghi has sharply criticized the prospect of such a move in the past. France and Italy have pushed for the issuance of a banking license, while Germany has strongly opposed it.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
