3 Central Bank Acts: RBA, BoE, ECB

By Kathy Lien (www.gftforex.com)

There are 3 interest rate decisions on the calendar this week from Australia, the United Kingdom and the Eurozone. Only 2 out of the 3 countries are expected to cut interest rates but all 3 rate decisions and the corresponding comments from central bank officials should trigger some volatility in the currency market. Although the amount of easing is important, what will receive more attention are the comments on how much further these central banks could cut interest rates. The upcoming rate cut is not expected to be the last for the Reserve Bank of Australia or the Bank of England and the expectation of further rate cuts could prevent a major recovery in the Australian dollar and British pound.

ECB to Keep Rates on Hold

After cutting interest rates by 225bp, the European Central Bank is expected to leave interest rates unchanged at 2 percent on Thursday. The prospect of a monetary meeting that leaves rates alone seems almost abnormal these days. We have gotten so used to these massive all-out efforts to see rates go to zero that the idea of no cut may be psychologically worrisome to some traders. The fact of the matter is Trichet has not been quiet about his preference to keep rates remain steady. The ECB President feels obligated to allow the latest string of action time to work its way through the economy. However, up until now, the concerns over a worsening economic environment has not permitted the ECB head the privilege of time. It is undeniable that economic conditions since the last meeting have not made any discernable efforts at improving. However, there are certain bright spots that may allow Trichet the breathing room to resist further cuts. This month has seen, along with some truly devastating figures, a pickup in German IFO, German ZEW, and the Euro-Zone PMI composite.

After the last monetary policy decision in January, ECB President Trichet signaled to the market that 3 weeks is too short of a time to deliver another rate cut and therefore March will be the next meaningful meeting. Unlike other central banks, the ECB has not been extremely aggressive with easing monetary policy and has instead tried to defer rate cuts as much as possible. Even though interest rates in the Eurozone are already at historically low levels, Trichet is still expected to cut interest rates further. The rate decision itself should be a nonevent which leaves Trichet’s post meeting press conference as the main focus. Traders will be looking for clues on how aggressive the ECB will be in March.

Concerns over economic growth still dominate in individual European countries. Despite the fact that some data surprised to the upside they are only small advances off of multi-year lows. Among the reports that may warrant a bit more concern is the severe shifts in EZ and German Unemployment. Even though Trichet has expressed the notion that the risks of deflation are negligible at this point, the overwhelming decline in CPI proves to be relevant. In addition, there have been the unprecedented measures that resulted in downgrades of some member countries, including Spain, Portugal and Greece. Others were left with warnings that their credit ratings were at risk. The higher costs of borrowing that accompany the rating cuts may provide reason for the ECB to continue cutting interest rates.