Focus on European Central Bank’s President Trichet
By William L. Watts, MarketWatch
LONDON (MarketWatch) — The Bank of England offered no surprises Thursday as its nine-member Monetary Policy Committee voted to make no changes to official interest rates and left its quantitative-easing program on pause.
In keeping with its usual practice when policy is left unchanged, the bank offered no details regarding the vote. Investors and economists will await the release of minutes from the meeting on Jan. 26.
The Bank of England’s official lending rate has stood at a record low 0.5% since March 2009, while the bank’s program of bond purchases, the centerpiece of its quantitative-easing program, has been on hold for 11 months since a total of 200 billion pounds ($315 billion) of purchases were completed.
The British pound (GBPUSD 1.5788, +0.0025, +0.1586%) saw little movement after the decision, holding a gain of 0.1% versus the U.S. dollar at $1.5762.
Attention now turns to the European Central Bank in Frankfurt, which is fully expected to announce that its Governing Council opted to leave the official lending rate unchanged at 1%.
The ECB’s rate announcement is scheduled for 1:45 p.m. Frankfurt time, or 7:45 a.m. Eastern.
The main event, however, will be ECB President Jean-Claude Trichet’s monthly news conference at 8:30 a.m. Eastern.
Trichet is expected to face a grilling over the central bank’s response to the deepening euro-zone sovereign debt crisis.
The ECB chief is expected to reiterate that the central bank’s bond-buying program, which has been credited with helping to ease recent turmoil in the euro-zone periphery, is designed solely to keep markets from becoming dysfunctional.
Economists say Trichet may strike a more upbeat note on growth amid ongoing signs of a strengthening recovery by Germany and other core euro-zone countries. Investors will also be eager to hear Trichet’s take on mounting inflation pressures after preliminary data showed consumer inflation topped the central bank’s annual target of just below 2% in December to hit 2.2%.
Bank of England policy makers, meanwhile, have shown increasing discomfort over a long run of above-target inflation. Moreover, consumer price inflation is expected to rise further above the central bank’s 2% target this year following the government’s decision to hike the value-added tax, or VAT, to 20% from 17.5%.
Uncertainty, however, over the impact of the government’s planned austerity measures and long-running expectations that spare capacity in the economy will weigh on price pressures were likely sufficient to convince a majority of MPC members not to make any policy changes.
Recent meetings have shown a three-way split on the panel, with Andrew Sentance dissenting in favor of a quarter-point rate hike and Adam Posen dissenting to call for a boost of the quantitative-easing program.
“Albeit with reduced confidence, we are retaining our view that the Bank of England will hold off from raising interest rates until the fourth quarter,” said Howard Archer, chief U.K. and European economist at IHS Global Insight.
“This reflects our belief that growth will slow appreciably in the first half of 2011 and that a soft labor market will prevent higher inflation expectations feeding through to lift wage growth significantly,” he said.
