Thursday, July 8, 2010

European central banks – previews for ECB, BOE (both Thurs morning) · ECB -$BOE

  • The ECB will continue to view the current level of interest rates as "appropriate", inflation as moderate over its policy-relevant horizon and the economic recovery as continuing at a moderate (but possibly bumpy) pace. With uncertainty still very high and business surveys easing back from their recent peaks, the ECB will not feel challenged by the recent data. And given that it regards a shift to more sustainable public finances as a precondition for improving private sector confidence, the central bank will show little concern about any near-term impact of fiscal tightening on growth. New liquidity measures are unlikely to be announced this week however, even though the ECB has only committed to supplying unlimited funds at its liquidity operations through to October. On the bank stress tests, Trichet could guide expectations, including on the question of how sovereign risks will be considered. the ECB may revisit the way it "sterilizes" the liquidity created through these purchases, with the issuance of debt certificates still an option (as opposed to the weekly offering of one-week term deposits). In terms of other asset purchases, the ECB completed its €60bn covered bond purchase program last week, the aim of which was to support this bank funding market. There has been no explicit mention of an extension, but neither has it been ruled out completely. Similarly, the option of purchasing other private sector assets, such commercial paper, has been mentioned, but only briefly by one ECB policymaker.


  • BOE - A majority vote for unchanged rates and unchanged QE at tomorrow's meeting is universally expected. But the minutes to follow in a couple of weeks time (and speeches in the meantime) will help get a sense of how the debate is evolving after Andrew Sentence ended 6 months of unanimity in the vote with his dissent for a hike in rates last month. After recent downward revisions to the growth outlook we look for the MPC to begin raising rates in May of next year, but the debate among MPC members looks likely to be rather more animated in the meantime.

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