Is it the ECB turn now?

Equity markets in Europe marked time today as investors wait for interest rate announcements from the Bank of England and the ECB. I don't think any economist expects a change from the BofE, and most expect no change from the ECB. If there is to be a surprise announcement, I would suggest it comes from the ECB. 

Today, we had the UK services purchasing managers index survey for January, the figure came in at 58.3, this survey bodes well for GDP estimates for the first quarter of 2014, as the service sector makes up nearly three quarters of the UK's GDP. Markit's chief economist, the company responsible for the survey, believes this survey supports GDP growth in the first quarter of 2014 of 0.8%. Service sector input prices also rose, but according to Markit, not sufficiently to give the Bank of England inflationary concerns, therefore putting no pressure on the BofE to raise interest rates. 

After Monday's much weaker than expected manufacturing PMI survey in the US, the services sector survey beat expectations today. Markit's service sector purchasing managers index rose to 56.7 from 55.7 in December. Markit comments that the pace of hiring "remains resilient as firms report the best outlook for three years". After a turbulent week these surveys should give investors some reassurance for the economic outlook. 

Predictions are for no change from the ECB, despite the recent slight improvement in the eurozone economy, inflation continues to undershoot and there is no sign of an improvement in the unemployment rate. Looking at the options open to the ECB to stimulate the eurozone economy, cutting rates again appears to be the least complicated. Cancelling the sterilisation policy could be contentious ahead of the German constitutional court ruling on the legitimacy of the bond purchase program. Some commentators believe it would be difficult for the ECB to introduce their own quantitative easing program, as they would be committed to buying bonds from different countries and different yields. I am not so sure, the Fed buy different assets in their program, therefore I don't see that would be so different to what the ECB would need to do. In conclusion, would I be surprised to see the ECB cut rates again tomorrow, no not really!

Posted on February 6, 2014 .