ECB and BOE meetings; I don’t expect any policy changes from either meeting. No rate changes and no changes to Quantitative Easing programmes.
However, as ever, the ECB’s post-meeting news conference will be fascinating and we can expect M. Trichet to appear relaxed and maybe even slightly smug given recent, calmer Eurozone developments. He’s guided the euro through bank stress tests, (a masterful piece of choreography), and the potentially troublesome maturity of last year’s provision of 12-month liquidity, the eurozone periphery sovereign bond markets have stabilised, with spreads over bunds tightening despite various rating agency downgrades over the last few weeks, and most of Europe has now headed off to the beach for a few weeks.
He may even feel bold enough to renew the withdrawal of special liquidity assistance which the ECB had planned to implement before the PIIGS debt crisis blew up. It is therefore possible that he announces that the September three-month liquidity repo will be the last to offer a 'full allotment policy', i.e. giving the banks as much liquidity as they want, but it is more likely that he prudently waits at least another month before making this announcement.
The crisis has passed for the moment and now begins the hard slog of fiscal retrenchment across Europe. Will the PIIGS have continued stomach for the pain involved? Will the renewed US slowdown, combined with a now resurgent euro, act as a brake on the nascent and patchy European recovery? Let us not forget that, absent action from Congress, the Bush tax cuts will expire at the end of the year, automatically implying quite a large fiscal tightening in the States also.
As regards the BOE, the MPC will have to contend with a slightly uncomfortable BOE Quarterly Inflation Report, pointing out the risk of continued elevated inflation, but the committee's dilemma is that the report will also adjust its growth forecasts downwards. One is reminded of Scylla and Charybdis, the two sea monsters of Greek mythology, sited on opposite sides of the Strait of Messina. They were said to be located close enough to each other that they posed an inescapable threat to passing sailors; avoiding Charybdis meant passing too closely to Scylla and vice versa. The MPC must plot a tricky course between the Scylla of inflationary over-accommodation and the Charybdis of premature tightening.
Thankfully, it seems clear that the overwhelming majority of the committee will not be swayed by Andrew Sentance’s hawkish arguments and will, like the ECB, have due regard for the ferocious fiscal tightening to come and the potential negative effects of a US slowdown, which seems to be becoming reality as lacklustre economic releases follow each other, day by day. Recent disappointments include figures showing zero month-on-month growth in personal income and expenditure and, chillingly, core PCE growth figures, (a favourite FED measure of inflation), which were also unchanged from the previous month. To complete the picture of gloom, factory orders and pending home sales were also below expectations.