ECB, Bank of England May Leave Rates Unchanged, Surveys Show
bloomberg.com
July 4 (Bloomberg)
The European Central Bank and the Bank of England will probably leave their benchmark interest rates unchanged this week as they wait for more evidence that economic growth is slowing across Europe, separate surveys showed.
The Frankfurt-based ECB will on July 7 keep its refinancing rate at 2 percent, where it's been for more than two years, said all 42 economists in a Bloomberg survey. The Bank of England, which considered lowering the repurchase rate from 4.75 percent last month, will also leave rates unchanged on the same day, according to all but one of the 40 economists in another survey.
Politicians including German Economy and Labor Minister Wolfgang Clement and economists at Standard & Poor's have urged the ECB to lower rates as oil prices close to $60 per barrel force governments to pare economic growth forecasts. U.K. first-quarter economic growth was revised down to 0.4 percent, below that of the euro region, as consumer spending slowed.
``In the short term it's wait and see and do nothing,'' said Eric Chaney, chief European economist at Morgan Stanley in Paris. ``The biggest difference is that for the Bank of England the next move is more likely to be a cut than a hike, whereas for the ECB the options are more evenly balanced.''
Investors have in the past week increased bets on a Bank of England rate reduction by the end of the year, while scaling back expectations for the ECB, futures trading shows. Since June 27, the implied rate on the three-month contract for December settlement fell 7 basis points in the U.K. and rose 5 points in the euro region. A basis point is 0.01 of a percentage point.
More Positive Europe
Surveys of economists suggest this week's data will paint a more positive outlook for the nations that have adopted the euro than of the U.K., where first-quarter growth lagged the dozen- nation euro region for the first time in more than four years.
Reports last week showed the euro's 12 percent retreat against the dollar this year is already helping exporters. European business confidence rose for the first time in nine months, a survey released by the European Commission on June 30 showed. German and French sentiment surveys also pointed higher.
German factory orders probably increased 1.1 percent in May from the previous month, rebounding from a 2.6 percent drop the month before, according to a survey of 35 forecasters. Growth in euro-region services probably held near May's seven-month high, according to the median prediction of 25 economists.
ECB President Jean-Claude Trichet, who is scheduled to speak in the European Parliament in Strasbourg later today, will hold a press conference in Frankfurt after the central bank's decision. The deliberations of the Bank of England's Monetary Policy Committee will be published on July 20.
Weaker U.K. Data
Citigroup Inc., the world's third-biggest currency trader, last week recommended investors sell the pound against the euro on speculation slowing growth will prompt the Bank of England to cut its benchmark rate this year. The euro area expanded 0.5 percent in the first quarter from the previous three months.
U.K. manufacturing output may have slipped 0.2 percent in May, the fourth contraction in five months, a survey of 29 economists suggested. Shop sales will also be released on July 5 by the British Retail Consortium. The lobby group said on June 7 that stores in the U.K. experienced their worst May on record.
``The U.K. data have been quite weak across the board,'' said Ian Stewart, chief European economist at Merrill Lynch in London, who expects the Bank of England to lower rates in September. ``The data in the euro zone have been disappointing, but not uniformly weak. We're going to see rates staying on hold for a long time.''
Bean Votes for Cut
Thirteen out of 24 economists surveyed by Bloomberg on July 1 bet that the Bank of England will cut rates in August. By comparison, just two of 32 economists questioned expect a cut in ECB rates before the end of 2005.
Bank of England Chief Economist Charlie Bean's decision last month to vote for lower rates has also boosted speculation that a drop in U.K. borrowing costs isn't far off. He joined with outgoing MPC member Marian Bell in advocating a cut because of slower growth, slack wage inflation and optimism that any inflationary pressures from higher oil prices will be temporary.
Bell's replacement, former Goldman Sachs European economist David Walton, will join the nine-member committee for his first rate-setting meeting this week.
Politicians are putting pressure on the ECB to cut rates. Germany's Clement said in Berlin on June 29 that the central bank's monetary policy ``isn't necessarily in our interest'' and S&P's chief European economist, Jean-Michel Six, said the next day the ECB should cut rates to help German growth.
Rejecting Calls
For now, the ECB is showing no sign of heeding those calls. ECB council member Yves Mersch said in an interview June 26 he sees no reason to change the ECB's benchmark lending rate. His colleague Lorenzo Bini Smaghi said a rate cut may be ``harmful'' because it would risk adding fuel to a property-price boom in parts of the euro region.
Investors have scaled back their expectations for lower ECB rates in the past week, futures trading shows. The implied rate on the three-month contract for December settlement was 2.03 percent on July 1, compared with 1.96 percent on June 22. The rate is still down from 2.59 percent on March 23.
The contracts settle to the three-month euro-area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's start in 1999. That rate was 2.11 percent.
The yield on the U.K. interest-rate future contract due in December was at 4.3 percent at the end of last week, down 27 basis points since the start of June. The contracts settle to the three- month U.K. London interbank offered rate, which since 1995 has averaged 16 basis points above the Bank of England's key rate.
``If the ECB was going to cut rates it would have done it by now,'' said Steven Andrew, an economist at fund managers F&C Asset Management in London. The Bank of England may lower rates as soon as November, he said. ``The bank will take a long, hard look at the consumption data. The trend is still one of deceleration.'' |
