Monday, July 30, 2007

ECB and Bank of England

ECB: August 2nd
The ECB are in holiday mode and this week’s Monetary Policy meeting is being held by teleconference, hence we won’t have the Bank’s President presiding over a detailed Press conference after the rate announcement. Given this, it is a formality that rates will remain unchanged and we won’t learn anything new about how the members think about future rate prospects because the ECB don’t issue detailed rate announcement statement. We are getting some definite signs of late the euro economy may have already peaked and with inflation running at a tame 1.8% on a month when oil prices soared, it may well be that markets have to reassess the rate outlook for the euro. Markets have currently priced in 2 more rate hikes this year, one in September and one in December.

BoE: August 2nd
Since the Bank last met in July, nearly all tracking indicators signal that UK house price inflation is slowing, the housing sector finally responding to a series of 6 rate increases in just 11 months. Inflation has also softened in the past 2 months, down to a 2.4% rate in June and there appears little reason for the MPC to tighten again in August. The minutes of the July meeting reveal that 3 members of the Committee voted to keep rates on hold, while a further 3 that voted for a rate hike were not as hawkish about future rate hikes, so there seems little prospect of an increase this week. The risks going forward for sterling could be firmly on the downside as recent data does not point to rates going beyond 6% this year and even a hike to 6% is not assured, although markets have it fully priced in. The Bank of England statement is unlikely to provide any detail so Thursday’s announcement won’t have any immediate market impact. Do expect investors to pare back sterling positions in the coming weeks though, which should see the currency decline.