Central Bank Watch: BoE, ECB and Fed in Focus

There’ll be a lot of attention on central banks on Thursday as the Bank of England announces its latest monetary policy decision and we get minutes from the latest meetings of the BoE, European Central Bank and Federal Reserve. To cap it all off, we’ll here from BoE Governor Mark Carney this evening, only hours after the release.

The BoE is expected to leave interest rates and asset purchases unchanged today as inflation continues to hover around zero despite the economy performing quite well and wage growth accelerating at a decent pace. There has been a clear willingness to consider rate hikes from policy makers in recent months but the subdued inflation picture is clearly troubling them.

The voting and minutes that will be released alongside the announcement should tell us whether recent data has discouraged policy makers from taking the bold decision to hike rates in the months ahead. No change in the voting is expected, although we could get a clear signal here if Ian McCafferty withdraws his vote for an interest rate hike again.

This will be followed shortly after by the release of the ECB monetary policy meeting accounts from the start of September. The accounts should offer detailed insight into the ECBs decision making last month which could prove important in the coming months if it is planning to ease monetary policy further, as is becoming increasingly likely.

It’s been almost a year since the ECB announced its asset purchase program and so far, the impact has been minimal. For most of this year we have seen small amounts of inflation but even that slipped back into negative territory last month. The risks and challenges facing the ECB when it made its decision are still largely there and to make matters worse, the euro is back trading at more elevated levels. The ECB must act if it intends to regain control of this. The turmoil in emerging markets is not helping matters and trade is also likely to be hampered by the stronger euro.

Markets have been more positive on the whole this week as we appear to have re-entered into a phase of bad news being good news and investors rewarding the prospect of interest rates being lower for longer. Friday’s weak jobs report was seen as further evidence that the Fed won’t hike rates this year, which when coupled with a Goldman Sachs report that claimed the first hike may not come until later next year, got the markets buzzing again.

Given that the FOMC decision came weeks before the jobs report and that Fed Fund futures prices are now pricing in a less than 40% chance of a hike this year, the reaction to the FOMC minutes may be skewed much more in favour of the doves this evening. Any increased hawkishness may have since been offset by those poor labour market figures, particularly those showing no wage growth, while a more dovish or cautious tone will be seen to support the view that the rate hike will be put on hold until next year, in light of the recent data.

Whichever it is, the Fed has a big job on its hands communicating its message clearly because as it stands, the market clearly isn’t buying the message that rates will rise this year despite to constant warnings.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.