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Day of the Central Banks

Day of the Central Banks

Solid growth, combined with a strong euro (EUR/USD approaching 1.40) and below-consensus inflation readings, makes today’s ECB meeting especially tough to call.

The composite PMI touched a new cycle high in April, led by solid service sector readings, especially in Spain and Italy, and private consumption is improving, as indicated by better-than-expected March Euro area retail sales.

However, a strong Euro is holding back exports from the Eurozone and making investment expensive. The falling inflation figure is not just a signal that the economy as a whole is not growing, but also a real threat in itself – Falling inflation can put downward pressure on wages and since loans are fixed in nominal terms, falling wages and prices increase the burden of paying them. And once people expect prices to keep falling, they put off buying things, weakening the economy further.

Given this conundrum, what will the ECB do?

The last 3 months have seen Euro weakening before the ECB decision, demonstrating the markets awareness of the possibility of a rate cut or further stimulus being announced. However every month the Euro has strengthened post decision, with no action from the ECB – will it be the same this month?

You could argue that if they have not changed before they will not change now, but surely with so many missed opportunities they won’t want to miss another…

In other news, the Bank of England are releasing their decisions on interest rates and the QE program. No changes are expected, hence the lack of focus in this update. However, there will be some reaction when the minutes are released in 10 days’ time.

Image: © DonkeyHotey / photopin

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