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Investors to put ECB and BoE rate decisions under scrutiny

Publish Date05/07/2012 05:10:54 AM

Last Update05/07/2012 06:35:18 AM

Investors to put ECB and BoE rate decisions under scrutiny

The main highlight of the week is today as investors will watch carefully the rate decisions by the two major European central banks amid expectations policy makers will act this month to boost the fragile recovery. 

Starting firstly with the ECB, after European leaders had took the first step towards a banking union integration, attention will shift to the ECB on expectations there may be a rate cut to bolster deteriorating economic conditions, especially after inflation rates have steadied.

Now, it is turn for the ECB to continue the measures that are expected to ease the debt crisis which is threatening global recovery as a cut in borrowing cost to a record low of 0.75% from 1.00% may help to bolster the euro area economy which will probably record a negative growth levels in the second quarter following the stall in expansion in the first quarter. 

Euro area manufacturing and services sectors recorded a contraction for the fifth consecutive month in June, where PMI composite index showed a contraction of 46.4 from 46.0 in May.

It seems that the sharp austerity measures adopted by European governments to conform to EU budget deficit rules have shaved growth and raised unemployment to record high.

ECB`s latest growth forecasts showed that the range will remain between -0.5% and 0.3% for 2012, in line with March`s forecasts, and between 0.0% and 2.0% for 2013, slightly narrower than previous forecasts.

As for inflation, it lingered at 2.4% in the year ended June as the slowdown in economic activities and lower oil prices pushed inflation levels to the downside.

The ECB revised down its inflation forecasts, compared to March, to a range between 2.3% and 2.5% for 2012 and between 1.0% and 2.2% for 2013.

With the ease in inflationary pressure, policy makers may be able to add to stimulus or cut interest rate when ECB governing council announces their monetary decision this week.

Last month, Draghi hinted indirectly to the possibility of cutting interest rate in the coming policy meeting to boost the anemic recovery by stating that "there is no inflation risk in any euro area country," where easing repayment loans to Spanish banks and providing funs directly to lenders will probably replace the ECB`s cheap loans provided to banks.

Also, a Spanish and French bond sales  will be awaited to see what will happen to the borrowing cost after the decisions announced by EU leaders last week.

In the U.K., the BoE is also expected to take a monetary step, yet it is not going to be a rate cut to the current borrowing cost of 0.50% but an increase in the size of APF program by 50 billion pounds to 375 billion pounds.

Policy makers will try to avoid further setbacks from the euro area which garroted the British economy into recession in the first quarter, where the most recent data refer that negative growth levels could be seen in the second quarter.

Yesterday, services saw slower expansion to 51.3 last month from 53.3, while earlier this week manufacturing saw a contraction of 48.6 last month from 45.9 a month earlier.

What could help MPC members right now to add to stimulus is the receding inflation levels which retreated below the upper limit of 3.0% to 2.8% in the year ended May, hitting the lowest level in 2 and 1-2 years.

Hence, boosting APF is now possible, especially after the change in policy maker`s position seen in June as the Governor, David Miles and Adam Posen preferred to increase the size of the APF by £50 billion to a total of £375 billion, while Paul Fisher called for a boost by £25 billion to a total of £350 billion.

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