The European Central Bank cut interest rates for a second straight month and may delve even deeper into its toolbox today to stimulate bank lending and fight off a recession.
ECB policy makers meeting in Frankfurt lowered the benchmark interest rate by a quarter percentage point to 1 percent to match a record low, as expected by 55 of 58 economists in a Bloomberg News survey. They may also loosen collateral criteria to give banks greater access to cheap cash and offer longer-term loans, said three euro-area officials with knowledge of the deliberations. ECB President Mario Draghi holds a press conference at 2:30 p.m.
“They will have listened to the banks and will start some measures to alleviate some of the strains in markets,” said Christoph Rieger, head of fixed income strategy at Commerzbank AG in Frankfurt. “They will also keep open the option to go below 1 percent on rates, that’s no longer the magic floor.”
The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight the debt crisis. Later today, Europe’s leaders will convene in Brussels for talks to frame the fifth “comprehensive” solution in 19 months to the turmoil, which has left Germany and France facing the threat of losing their AAA rating from Standard & Poor’s.
Bank of England
The ECB’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union.
The Bank of England kept the size of its asset-purchase program unchanged at 275 billion pounds ($432 billion) today and left its key rate at 0.5 percent.
Investors will look for signs from Draghi that the ECB is willing to step up its bond purchases to cap government borrowing costs if leaders agree on a concrete plan and timeline to stamp out the crisis, said Grant Lewis, head of research at Daiwa Capital Markets in London.
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BOE Maintains QE Amid Europe’s Debt Crisis
Bank of England officials maintained their current round of stimulus as European officials hold a summit on the debt turmoil that Governor Mervyn King says is beyond his control.
The Monetary Policy Committee voted to keep the target for bond purchases at 275 billion pounds ($432 billion), as predicted by all 39 economists in a Bloomberg News survey. It increased the target by 75 billion pounds in October and expects those purchases to be completed in February. King said last month there’s little point in “fine tuning” policy as officials watch to see how events play out.
The European Central Bank may cut interest rates today and euro-area leaders will start a two-day summit whose outcome could determine if any of the region’s members can keep a top credit rating with Standard & Poor’s. While King is holding fire on more stimulus, he introduced a new sterling liquidity measure this week to help banks weather any further escalation of a crisis that’s crimping demand and pushing up funding costs.
“For practical reasons and because the Bank of England isn’t sure precisely what the policy stance should be, we’re unlikely to see anything happen until February,” Philip Shaw, an economist at Investec Securities in London, said before the announcement. “You’d need a severe leg of the crisis to spring up on markets for the bank to move before that. But it’s likely that we are nowhere near the end of policy easing.”
The Bank of England also left its benchmark interest rate at a record-low 0.5 percent today, as forecast by all 52 economists in a Bloomberg survey.
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U.S. Growth May Put Fed Asset Purchases on Hold
The U.S. economy may have achieved a sustainable pace of growth that eases pressure on the Federal Reserve to buy more bonds while giving it time to fine tune how it informs the public about the outlook for interest rates.
“Recent economic data takes away some of the urgency for the need to engage in a new round of quantitative easing,” said Michael Feroli, a former Fed economist who is now chief U.S. economist at JPMorgan Chase & Co. in New York. The Federal Open Market Committee “can say, ‘Let’s wait and see if this is going to build on itself.’”
Since the Fed’s last meeting early in November, reports on employment, manufacturing and retail sales have dispelled concerns the world’s largest economy may slide back into recession. Signs of economic strength, along with coordinated central bank action to alleviate the European debt crisis, last week helped drive the biggest rally in the Standard & Poor’s 500 Index since March 2009.
The FOMC will update its outlook on the economy in its Dec. 13 statement and maintain a pledge to leave the benchmark lending rate at zero until at least mid-2013, Feroli said. Policy makers at their two-day January meeting may announce a strategy for improving how they communicate their policy goals to the public, said Antulio Bomfim, senior managing director at Macroeconomic Advisers LLC in Washington.
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Canada’s Dollar Strengthens as Option Traders Turn Less Bearish
Canada’s dollar rose against a majority of its most traded counterparts and strengthened versus the U.S. currency as options traders turned less bearish on the currency on speculation it may benefit from rising oil prices and North American economic growth.
Canada’s dollar, nicknamed the loonie, traded at almost the highest since September against the euro before a meeting of the European Central Bank, at which economists predict policy makers will cut the benchmark rate by a quarter-percentage point. Crude oil stayed above $100 a barrel.
“The Canadian dollar can probably hold up better than its commodity-currency peers,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London, in a telephone interview. “Canada is far less exposed to Asia, far more exposed to the U.S. where the data flow has been slightly better recently. That maybe points to a slightly more robust picture in North America.”
Canada’s currency rose 0.2 percent to C$1.0083 per U.S. dollar at 7:38 a.m. in Toronto. It rose against all of its 16 most-traded peers except the yen, the Brazilian real and the New Zealand dollar. One Canadian dollar buys 99.15 U.S. cents.
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