The last time Central Banks met, there was disappointment in the lack of action and a certain element of disbelief that they perhaps did not see the severity of the situation in the same light that other economic parties did. This time round it may all be different.
Tonight the US FOMC meets to discuss the state of the US economy as well as make decisions on interest rates and indicate the path of monetary policy. In the past meeting, the FOMC have been somewhat quiet on economic stance despite loud calls for more action. As the crisis in the Eurozone has deepened and US data has failed to impress, it is increasingly likely that statement to effect could suggest action on the way. One thing for sure is that the current ‘Operation Twist’ will not sustain the rotting economy.
The Bank of England and the ECB will both be watching events in the US closely. Tomorrow it is their turns to sit at decision making tables. The pressure is mounting on the Bank of England to take further action – they certainly have the room to do so. Inflation is falling in the UK, so is GDP. We have seen small steps forward with QE in the past few months, but as inflation has fallen further and GDP figures show the UK economy deeper in a recession, expect a decision that could shake up Sterling (or at least the minutes to show this on the way.) The ECB is considering a cut in interest rates to help control the rising cost of borrowing. Although this may be a positive gesture, the trust is that Spain and Italy cannot afford their debt and unless bond prices are driven downward, Spain will inevitably default shortly. The problem with the Eurozone is the political battle is far from won, which means the economic one hasn’t begun.
This could be an interesting August. (JKM)