The BoE was first in line today as they released their rate decisions at 5.25% keeping them unchanged since their last decision. This decision came in no surprise in the market but the Pound was able to react to reach previous levels of 2.000. On the other hand U.K. stocks fell slightly after the release of the decision as the FTSE 100 dropped 0.2%.
Although signs of sluggish growth and softness in the first quarter in the U.K. were evident after manufacturing data and consumer confidence slipped and rising food and energy prices; the MPC's decision remained firm. Then again, the service sector showed a great rebound in February to 54.0 from 52.5 which indicates an expansion since the reading was reported above 50. The bad thing remains, that inflationary pressure could spike in the U.K. in the upcoming months as they will be driven by higher utility bills.
According to the British Retail Consortium, the decision now to hold rates steady makes sense in order to fight inflation but a cut in interest rates by the BoE must be seen as soon as possible to avoid a slowdown being turned into a recession.
Less than an hour later, the ECB also released their interest rate decisions where they also decided to stand pat. Benchmark interest rates were held steady at 4% since June when it was hikes by 25 basis points.
Similar to the U.K., inflation in the Euro Zone is critical and must be watched closely since their CPI is at 3.2% well above the ECB's medium-term target of 2%. But recently, figures have shown that the European economy is still not facing a major threat as the IFO readings indicated bright outcomes after releasing an unexpected rise.
Well inflation isn't the only problem now after the Euro breached the $1.50 psychological barrier and is currently trading at $1.53. The continuous deterioration of the dollar and the aggressive cuts made by the Feds in the U.S. might overcome any words made by Trichet to try to take down the Euro. A rising Euro is definitely not the way to go because it might under-cut the Euro-zones exports. And if this happens, growth will definitely be affected as well.
ECB President Mr. Jean Claude Trichet stated at press conference that the ECB must firmly anchor inflation expectations and that they are the highest priority. Monitor all developments will be done closely but there are still high risks to price stability in the medium term. Currently the economy has no major imbalances and according to the ECB Staff, their projections for the GDP in 2008 range between 1.3% - 2.1% and will climb slightly in 2009 to 1.3% - 2.3% as risks to economic growth outlook remain to the downside. Concerning short term inflation, the ECB sees strong upward pressure as the HICP is likely to remain above 2.0% in the upcoming months. The HICP range for the 2008 will range between 2.6% - 3.2% and for 2009 will be between 1.5% - 2.7%. Inflation is likely to moderate only slowly later in 2008. He also stated that its very important tat all parties help avoid second round effects and that the council will monitor wage developments with high attention. As for M3 supply, growth seems to remain very vigorous but some temporary factors suggest that M3 growth is overstated.
The Euro was unable to react over Mr. Trichet's testimony and after the unanimous decision to leave rates unchanged. The ECB will never pre-commit in the medium term and a future rate cut is unknown.
Well dear reader, we know what the ECB and BoE think about the current market situation but tomorrow will be the big day as the U.S. will release its Job's report indicating whether the recession is a reality or a really long nightmare. Brits and Europeans, stand down and pass the microphone to the AmericansÃ¢â‚¬Â¦