Sterling has been blasted lower after BoE governor Carney cast doubt on a previously pretty-much-expected UK May rate hike. The EU's rejection of Britain's latest Brexit-Irish border plan only served to deepen the rot.
Article / 10 January 2013 at 5:46 GMT

3 Numbers to Watch: BOE and ECB decisions plus US jobless claims

editor/analyst /
United States

The Bank of England and the European Central Bank are widely expected to keep their respective interest rates unchanged in today's monetary policy announcements. Meanwhile, weekly jobless claims for the US are projected to post a modest decline.

Bank of England Interest Rate Decision (12:00 GMT): The UK's economy is weak, but not weak enough to inspire the monetary mavens to unleash a new round of stimulus. The BOE will keep its target interest rate unchanged at 0.50 percent in today's announcement. That is the consensus view of analysts, and the monetary policy committee's December minutes (pdf) do not provide much encouragement for arguing otherwise. This despite the general forecast from the central bank for a slow recovery at best. Inflation, on the other hand, is expected to remain above the BOE's 2 percent target "for the next year or so," according to the minutes.

Inflation concerns, it seems, continue to trump worries about growth. Indeed, the BOE still expects that the economy will post a decline in last year's fourth quarter final read for GDP. If that raises the spectre of a triple-dip recession scenario for Britain, the British Chamber of Commerce begs to differ. The BCC's recently published Q4 economic survey report "welcome progress" in business confidence in the final three months of 2012 vs. the previous quarter. "The marked increase in confidence in Q4... reinforces our view that the economy will recover slowly in 2013." Does the BOE agree? Keeping the target rate at 0.50 percent is effectively answering "yes." Actions speak louder than words in central banking.

European Central Bank Interest Rate Decision (12:45 GMT): The ECB, like its counterpart in the UK, is content with the status quo in terms of the target rate. The 0.75 percent main refinancing rate will likely remain as is, according to analysts. But with signs of a divided Governing Council in the ECB, the possibility for more easing resonates a bit stronger compared with reading the monetary tea leaves at the BOE. But not yet, despite the ill macro winds blowing across the Continent. Eurozone unemployment continues to rise - hitting a record high 11.7 percent jobless rate in November, and more than twice that level in Spain and Greece. But virtually no one thinks the central bank will cut interest rates today.

Whether it should cut is another matter.  I will outsource here to economist Martin van Vliet, who observes: “With more fiscal austerity in the pipeline, the debt crisis still unresolved, and unemployment rising... consumers and hence businesses still have plenty to worry about. Moreover, despite the recent improvement, euro zone economic sentiment remains in recession territory.”

Compared with the other key central banks of the world (Britain, US, and Japan), the Eurozone continues to suffer the highest target rate and the darkest economic outlook. Okay, maybe there is a tie with Japan's perennially moribund economy. In any case, if you think the sad state of macro affairs in the EU is going to inspire a rate cut today, you are in the minority.

US Jobless Claims (13:30 GMT): In a light week for US economic news, today's update on new filings for unemployment benefits is the major event in terms of new data points for clues about what is coming. That is a good thing if the consensus view holds and claims post a modest drop for the week through January 5. That is also in line with my econometric projections, which anticipate a drop to around 367,000 versus 372,000 in the previous week.

New claims that remain within shouting distance of the post-recession low of 342,000 from last October will keep the mood upbeat on the US macro outlook for the rest of the week, if only because there are no other economic numbers of import to sour the crowd's sentiment. As such, a decent number for claims will build on last week's favourable if unspectacular payrolls report for December. Good thing, too, as the market will need all the statistical support it can muster to prepare for the next phase of budget battle brewing in Washington over the debt ceiling.  



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