ECB and BoE decisions' on extraordinary measures expected

From our latest Top Down Outlook:

The ECB is widely expected to leave the rate unchanged at 1% at the close of its monetary policy meeting on Thursday, since economic data published in the last few weeks did not change the economic outlook depicted by ECB Chairman Trichet during the latest press conference in January. While economic activity continued dilating at the end of 2009, uncertainty as to the sustainability of current economic recovery remains high as a number of supporting factors are merely temporary. Moreover, inflationary pressures have been well contained and are expected to remain below the ECB’s 2% target both in 2010 and 2011. Trichet also emphasized that the ECB will continue supporting the credit market, but will gradually phase out extraordinary liquidity measures. We estimate that rates are likely to remain unchanged at least until the end of H1 2010, gradually rising to 1.5% by the end of 2010. Nevertheless, we believe that the running risk facing our projections is that rates may be lower and not higher than our year-end estimate.

With interest rates expected to remain unchanged at 0.5%, the main item of interest of Thursday monetary policy meeting will be the BoE’s decision on the asset purchase programme. At the end of January’s monetary policy meeting, the BoE announced that thus far the purchase of GBP193bn out of GBP200bn has been made and that the programme shall take another month to complete. We believe that the BoE may decide to stop the programme in February as the economy is showing signs of bottoming out from recession. However, we believe that a rate hike by the BoE is hardly at hand. The latest economic data published in the UK (i.e. Q4 GDP figures) indicates strong prospects of economic activity rebounding in the next few months, though economic recovery is likely to be subdued. Moreover, even if the CPI rose to 2.9% y/y in December, and possibly exceed 3% in January, inflationary pressures are likely to soften in the months ahead. We do not pencil in a rate increase by the BoE, at least until Q4 2010. The inflation report of 10 February and the ensuing press conference by BoE Governor King will further detail the BoE’s monetary policy outlook.