The European Central Bank (ECB) and Bank of England (BOE) will hold monetary policy meetings on Thursday October 8th. At the September ECB policy meeting the ECB elected to hold interest rates at a record low and indicated they were in no hurry to withdraw stimulus. At the May policy meeting the ECB reduced interest rates to a record low 1%, expanded its repo auctions from six months to 12 months and announced a plan to buy €60 bln in covered bonds. In June, the ECB offered a record $629 bln of cash allotment to banks to improve liquidity. The ECB is widely expected to hold a policy steady at 1% Thursday and the trade will be looking to the press conference following the ECB meeting for the ECB's outlook for the EU economy and possible clues to the timing of an exit strategy from unconventional policy measures. The ECB is expected to acknowledge that the EU economy is improving but that the growth outlook remains uncertain. The ECB has tied the timing of the end of its accommodative monetary policy to price stability. ECB's Liikanen said that the central bank will exit nonconventional monetary policy when the economy allows. ECB's Ordonez says that he sees a slow recovery and expects inflation to remain low for some time. Comments from ECB's Liikanen and Ordonez suggest that ECB policy will be on hold for some time. Steady ECB policy decision is already discounted and the impact of ECB meeting for the EUR should be limited. If the ECB were to surprise and hint that the timetable for its exit strategy will be moved forward the EUR could extend this weeks rally.
At the September BOE policy meeting the BOE elected to continue its plan to buy £175 bln in asset purchases to try and boost UK growth and to hold its overnight rate unchanged at 0.5%. The BOE overnight rate has remained at a record low 0.5% since March. In June, divisions on the BOE policy board emerged with BOE Governor King and two other policy members seeking an expansion of the asset purchase program to £200 bln. In September the BOE policy board unanimously agreed to maintain the asset purchase plan at £175 bln. The unanimous decision to maintain the current level of asset purchases was seen as an indication that the BOE is more confident about the UK economic outlook and sees less of a need to expand accommodative policy. GBP has been underperforming partly because of speculation that the BOE may soon reduce its remuneration rate paid on commercial bank holdings. The remuneration rate is currently at 0.5%. The BOE is expected to hold policy unchanged but there is an outside chance that the BOE may cut its remuneration rate it pays on commercial deposits. The trade will be looking to see whether the BOE decides to expand quantitative ease. Market consensus is that the BOE is leaning towards cutting the remuneration rate and maintaining the current level of asset purchases. The shadow MPC committee says the BOE should extend quantitative ease beyond November. GBP rallied after BOE elected to maintain the current level of its quantitative ease in September. A decision to expand quantitative ease or cut the remuneration rate could spark significant selling of the GBP.
The RBA hiked rates 25 bps to 3.25% Tuesday and signaled that more rate hikes may be needed as the economy strengthens. The rate hike was seen as a surprise by some analysts. The fact that the RBA is the first major central bank to hike rates will intensify speculation about which central bank will be the next to follow the RBA. Rate hikes by the Fed or ECB are not expected until mid 2010 at the earliest and the BOE may not be finished easing policy. In the policy statement accompanying the RBA rate decision the RBA said that they see the global economy resuming growth that China's growth is strong and that inflation was likely to move close to target. The RBA noted that the overnight interest rate is at a historically low level. The 3% benchmark rate was the lowest since 1949. This would suggest that the RBA may consider more rate hikes down the road. It's not clear that other central banks are as confident as the RBA about the outlook for the global economy. The RBA rate hike will have limited influence at Thursday ECB and BOE policy meetings.