The European, UK and US central banks are all scheduled to hold monetary policy meetings this week, ...
The European, UK and US central banks are all scheduled to hold monetary policy meetings this week, with markets poised for signs of further monetary easing to boost bond prices.
The US Federal Reserve's Open Market Committee meets on 6 May, to decide whether to cut the Fed Funds rate, currently at 1.25%, for the first time since November 2002.
The meeting follows the release of US consumer confidence figures for April, which recorded the largest monthly gain in 12 years on the back of an end to conflict in Iraq.
Late last month, Fed board member J Alfred Broaddus said the US economy is fundamentally sound and should improve now that the war in Iraq is winding down. Taken together, these factors make it seem unlikely the Fed will cut interest rates this week, a sentiment borne out by the narrow spread between the 1.25% Fed funds rate and the implied yield on the Fed funds futures contract for May, which was at 1.21% on 29 April.
On this side of the Atlantic however, the chances of easing at the Monetary Policy Committee (MPC) meeting on 7-8 May are looking stronger after the release of a downbeat quarterly CBI industrial trends survey, which showed optimism among industrial firms weakened compared to the January survey, to stand at its lowest level since early 2002.
However Gerrard chief economist Simon Rubinsohn notes the new survey was conducted between 20 March and 9 April, when the war on Iraq was in full swing. 'One positive sign for the economy was the confirmation of a slight improvement in the pricing power of industrial companies. But even this needs to be treated with caution as the survey points to an even faster rebound in costs suggesting a further squeeze in profit margins,' he says. In Europe, the April German IFO survey of business expectations came in below the March figure and some way down on forecasts.
Rubinsohn says the fall in the current assessment of business conditions was less pronounced than the forward expectations part of the survey, which could suggest the Iraq conflict raised fears about the outlook rather more than damaging actual business activity. 'The resolution of the war and the sharp fall in oil prices suggests that this picture could improve in the May survey,' he adds.
Nonetheless, Rubinsohn notes, the data strengthens the case for a further round of interest rate cuts both in the UK and Europe.
Andrew Roberts, bond strategist at Merrill Lynch, says recent comments from Sir Andrew Large, deputy governor at the Bank of England, that he is becoming less worried about low interest rates boosting household debt, suggest UK interest rates could fall below 3% if the economy weakens further.
'We need more evidence of this of course, and government economists' call is still for them to bottom at 3.5%. Yet the ECB is still adopting quite sanguine rhetoric, and we may have to wait for their cuts,' he says.
Roberts forecasts the MPC to cut its base rate by 25 basis points to 3.50% this week.
Rubinsohn expects the committee to keep its powder dry at the May meeting, with recent falls in the oil price enough to provide a powerful stimulus to the world economy, although the strength of the euro may encourage the ECB to take further action on monetary policy.
German business expectations down.
MPC less worried about impact of cutting rates.
UK industrial outlook worsening.
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