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Interest Rates Decisions Day

Interest Rates Decisions Day

As today is the first Thursday of the month we have the interest rate decisions from the ECB and the Bank of England. In reality, the focus will mainly be on the European Central Bank as the Bank of England is not expected to make any moves after its latest Inflation Report detailed its future plans.

Although most economists remain confident that there will be no interest rate cut from the ECB, there is the underlying possibility that the continued threat of deflation and high unemployment rate may force Draghi’s hand sooner rather than later. Regardless of rate movement or otherwise, the markets will be keeping a close eye on Draghi’s press conference 45 minutes after the announcement to see if Draghi says anything new.

Yesterday saw a good data day for the Eurozone as better than expected Service PMI data and retail sales showed marked improvement and erased December decline. The divergence between the BOE and ECB will grow soon, as the former is on the way to tightening, and the latter considers the tools for stimulating more.

So, with no movement from the BoE, interest rates will have remained at a record low of 0.5% for a record 5 years. The markets are very pro-GBP at the moment as the investors understand that the UK will be one of the first among G7 to start tightening again. The recent Services PMI only supports the idea of strong GDP growth this quarter, and this hope will keep the pound on demand. We have also seen UK mortgage approvals and house-price growth increase to the highest levels since 2007, manufacturing expanding and job creation soaring to a 33 month high.

In the US Janet Yellen took her swearing-in event at Washington to confess that  the Fed has more to do to reach its goals for inflation and unemployment, and to repair damage from the financial crisis. The Beige Book review of regional conditions, released yesterday showed how the economy in most districts grew last month despite the adverse weather conditions.  Yellen and her policy-making colleagues are trying to determine whether recent economic weakness stems from weather or fundamental obstacles to growth.

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