Global EconomyWeek Ahead-Central bank meetings to set stage for parting of ways

August 3, 2014

London (Aug. 3)  After the Federal Reserve maintained its path towards raising U.S. interest rates next year, other major central banks will jostle for space on a crowded stage this week.

The European Central Bank, Bank of Japan, Bank of England and the central banks of India and Australia all hold meetings. While imminent action is unlikely, the time when policy settings start pointing in different directions is nearing.

U.S. growth rebounded in the second quarter and the Fed upgraded its assessment of the economy last week. It is on course to stop creating money in October but the expectation is that there will be no interest rate rise before mid-2015.

That puts the Bank of England in pole position to be the first major central bank to push rates up from their record low 0.5 percent, perhaps before the year is out.

Although the UK economy is expanding at an annualised clip in excess of 3 percent and unemployment is tumbling, the absence of wage pressure means there is no immediate reason to act.

The consensus is that rates will not rise until early 2015 but polling by Reuters last week found economists expect a first voice or two on the nine-strong Monetary Policy Committee to call for a rate rise this week.

The last time the MPC was considering raising rates was in 2006. In May of that year, one MPC member voted for a hike and it took just three months before a majority followed suit.

"We expect the jobless rate will continue to fall rapidly, with the BoE hiking earlier and further than markets project," said Michael Saunders, chief UK economist at Citi.

The voting pattern will only become public when minutes of the meeting are released two weeks hence.

The Fed has just registered its first dissenter, with the hawkish Charles Plosser saying the commitment to keep rates near zero for "a considerable time" did not reflect the gains made by the economy.

Lack of wage inflation has been a common theme in the United States and euro zone as well, though U.S. labour costs recorded their biggest gain in more than 5-1/2 years in the second quarter. That spooked Wall Street last week as it may hasten the Fed's first move.

The European Central Bank, which also meets on Thursday, faces a very different problem to the Bank of England.

Euro zone inflation has slipped further - to just 0.4 percent in July - and if it does not start picking up soon, the pressure to start printing money will grow despite strong reservations within the ECB's Governing Council.

"(The inflation data) don't give any assurance that the euro zone is already out of the deflation danger zone," said Peter Vanden Houte, chief euro zone economist at ING.

"Moreover, with the escalating conflict with Russia dampening growth prospects, it seems unlikely that deflation fears will disappear any time soon."

Having cut all its key interest rates in June and unveiled a new scheme to prime banks with cheap long-term money from September in the hope they will lend it on, the ECB will not act until it has had time to judge the impact of those measures.

If the ECB won't consider more dramatic action until late in the year, it will have a small window of opportunity to act before U.S. rates start heading higher in 2015.

Policymakers admit there is little chance of euro zone long-term interest rates decoupling from U.S. ones if they start rising.


The Bank of Japan will deliver its latest policy verdict on Friday, following the sharpest fall in factory output since the devastating earthquake and tsunami of 2011.

With the BOJ already having created money at a furious rate, any policy shift is unlikely. But it may have to temper its assessment that production is "rising moderately as a trend", toning down its upbeat language on the outlook as it becomes less sure about when or even if exports will rebound.

The Reserve Bank of India will leave its key interest rate at 8 percent on Tuesday and won't ease policy until early next year on fears food inflation will spike if monsoon rains are below average, according to a Reuters poll.

Growth is slowing and has stayed below 5 percent in the past two years, well below levels needed to create enough jobs for India's young and expanding workforce.

The Reserve Bank of Australia is also expected to hold rates at 2.5 percent when it meets on Tuesday. Its next move is likely to be up rather than down, but not until next year.

Chinese trade data are due on Friday, kicking off the monthly run of indicators.

Latest survey evidence from the world's number two economy showed factories posted their strongest growth in at least 1-1/2 years in July, adding to evidence that the economy is gaining momentum after a spate of state stimulus measures.

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