MacroScope

ECB forecasts to contrast with Britain’s

By Mike Peacock
December 5, 2013

The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.

The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.

For today, another rate cut after last month’s surprise move would be a huge shock. Launching quantitative easing is anathema to much of the Governing Council unless it was clear a Japan-style downward price spiral was in the offing, which it isn’t. The bank’s vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight – now at zero – into negative territory in an extreme situation.

So most likely is a repeat of LTRO low-interest long-term loans for banks and even then, not until next year.

The ECB is clearly uncomfortable with the piecemeal progress on banking union and from euro zone governments with their structural reforms. But with banks facing health checks next year, which could throw up some problems, more liquidity would help them over the hump although there is no evidence that last year’s more than 1 trillion euros pumped any more lending into the real economy.

Britain’s Bank of England meeting will almost certainly leave things unchanged, especially after chief Mark Carney pulled back on cheap mortgages last week by redirecting the Funding for Lending scheme.

That leaves the stage clear for finance minister George Osborne’s autumn budget statement. He will be able to crow about the first upgraded economic growth forecasts and lower projected borrowing for several years after a surprisingly strong rebound in recent months. Standard & Poor’s – the only one of the three major agencies not to strip Britain of its ‘AAA’ status – said on Wednesday it could put its rating on a more stable footing if stronger-than-expected growth looked to have become entrenched.

But Osborne has a harder job countering the opposition Labour party’s charge that while growth has returned, few people feel it with the cost of living far outstripping wage growth.

So much has been pre-announced it’s hard to know if there is a remaining rabbit to pull from the hat. The government has said green levies would be altered to help bring down high energy bills (Labour is promising a freeze on domestic energy prices).
Osborne has also told government departments they will have to cut spending by a further 1 billion pounds a year for the next three years to fund lower business taxation and more investment. He is also expected to slap capital gains tax on foreigners investing in UK property.

And yesterday, the government said the six big UK insurers have agreed to invest 25 billion pounds in transport and energy projects over the next five years. That will keep those projects off the national balance sheet but the question is what return those companies have demanded, i.e. is this short-term gain for long-term pain. Britain has been here before.

As always, this is a big political moment. Elections are now only 18 months away.

Norway’s central bank also delivers a policy decision and is expected to abandon plans to hike rates next year and may even project a rate cut after dismal growth and sentiment numbers over the past several months.

In its last auction of 2013, France will sell 3-4 billion euros of medium and long-term bonds. Politically sensitive unemployment figures are already out showing the jobless rate ticking up to a near-record 10.9 percent. President Francois Hollande had pledged to get them falling by year-end but has now backed away from that commitment for the obvious reason – it probably won’t happen.

Spain is also in the market offering four- and five-year bonds. It needs only around 700 million euros to complete its 2013 issuance, after which it will use the remaining cash raised to pay down short-term bills in an effort to extend the average maturity of its debt portfolio.

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