Euro and Pound trading remained relatively flat in the hours prior to the rate announcement by the Bank of England. Despite expectations that the bank will keep the policy rate steady at 0.50%, investors will be looking for explicit language in the accompanying statement that indicates a policy shift towards that of the Federal Reserve’s massive $1.25 trillion quantitative easing program.
The interest rate announcement from the Bank of England headlines the economic calendar in European hours. While expectations widely call for policy rates to remain unchanged at the record-low 0.50%, price action may turn volatile regardless if Mervyn King and company signal an expansion to standing quantitative easing measures. So far, the bank has committed to buying 75 billion pounds in medium- and long-term government bonds. The growth and inflation outlooks are certainly supportive of a looser monetary stance: reputable think tank NIESR reported that the economy shrank -1.5% through the first quarter and could continue to contract for up to one more year; meanwhile, the Producer Price Index is set to fall to 2.1% in the year to March, the lowest since August 2007, pointing to downward pressure on consumer prices (the headline inflation gauge) in the pipeline as manufacturers pass on lower production costs via cheaper finished goods. Separately, the Trade Balance deficit is expected to narrow to 3.45 billion pounds in February from 3.58 billion in the prior month. This seems plausible if lackluster consumer demand weighs enough on imports to outpace the drop in outbound shipments, the latter fueled by the impact of the global downturn on foreigners’ purchases of UK wares. Indeed, consumer confidence has been hovering near record lows since January.
