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Thursday, the European Central Bank is expected to hold its key interest rate unchanged for the sixth straight month when its Governing Council reviews its monetary policy. The central bank is expected to continue its extraordinary measures for the time being, though calls for setting exit measures have strengthened.
The ECB Governing Council, led by President Jean-Claude Trichet, is likely to leave its key interest rate, which is the interest rate on main refinancing operations at 1%. Interest rates on marginal lending facility and deposit facility are expected to be held at their current levels of 1.75% and 0.25%, respectively.
The Frankfurt-based ECB is set to announce the decision at 7.45 am ET. Thereafter, Trichet and ECB Vice President Lucas Papademos would hold a regular press conference. The ECB President is likely to repeat his statements made last month.
"We do not expect any new comments, either on the euro or on interest rates," ING Senior Economist Carsten Brzeski said on November 2. "It even remains doubtful whether the ECB will already want to give any insight on its intentions to mop up liquidity," The economist said the central bank is expected to make any important comment at the Santa Calus meeting in December.
Commerzbank analyst Jörg Krämer said on October 30 that the ECB is likely to make only modest changes in its communiqué. Commerzbank expects healthy third quarter growth for the Eurozone region. At the same time, the firm said the ECB would harbor doubts about the solidity of the growth that has emerged in the second half of the year.
On October 15, Trichet said the non-standard measures need to be phased out as the situation normalizes, and substantial policy stimulus must be withdrawn. "When the appropriate time comes, there should not be any concern about the ECB's ability to exit," he said, adding that the ECB's decisions on interest rates and liquidity have been transmitted reasonably well to the rest of the economy.
"Trichet might hint that the ECB intends to begin to rollback unconventional measures next year, but we do not expect him to give anything like a master plan or even an indication of a schedule for the auctions next year," Danske Bank Senior Economist Frank Øland Hansen said. "Trichet will also reiterate that "current rates remain appropriate" and will not signal any rate hikes for the near future," the economist added.
Last week ECB Governing Council member Axel Weber said, "Unconventional measures will likely be rolled back next year."
The ECB is expected to introduce an extra charge for its 12-month operation due on December 15, the third and final tender set for this year. Banks drew EUR 75 billion at the last offering in September, down from EUR 442 billion in the first tender in June.
The Eurozone economy probably exited the worst recession in the third quarter. According to an interim forecast by the European Commission, published on September 14, Eurozone would grow 0.2% in the third quarter and by 0.1% in the fourth quarter.
"The end of recession in the third quarter still needs to be confirmed by the data but looks to be only a formality," ING economist said. Growth momentum should continue in the fourth quarter. However, the economist said the strong euro and lacklustre lending should give the ECB some headaches.
Tuesday, autumn forecast from the Commission showed that the 16-nation bloc is set to contract 4% this year, unchanged from its interim economic forecast. The commission sees a gradual recovery with GDP growing 0.7% in 2010 and around 1.5% in 2011. The commission raised its forecast for 2010 from the 0.1% GDP decline predicted in its Spring forecast. The Eurostat is due to publish flash estimate of third quarter GDP data on November 13.
But the return to growth is unlikely to give scope for commencing interest rate hikes, given the fragility of the recovery.
On October 26, ECB Governing Council member Christian Noyer said, "We have stabilized our economies and avoided the worst. There are many downside risks and adverse scenarios that could still materialize."
That said, inflation readings have been benign. Preliminary data showed Eurozone inflation stayed negative for a fifth month in October, while jobless rate in September rose to its highest level in more than a decade. But economic sentiment strengthened more than expected in October pointing towards a possible recovery in the third quarter. Manufacturing sector posted its first expansion in seventeen months in October and services sector continued to expand for the second month.
Meanwhile, the Bank of England, whose Monetary Policy Committee is meeting for a 2-day meeting ending today, is expected announce an increase in the size of its quantitative easing measures by GBP 50 billion to GBP 225 billion to aid the ailing economy. The central bank is also likely to maintain the key rate at a historic low of 0.5%.
Tuesday, the Reserve Bank of Australia, the first G20 central bank to raise interest rate after the global economic crisis, hiked key interest rate for the second month in November. The central bank lifted the rate by 25 basis points to 3.5%. In October, it had announced a 25 basis points increase in its interest rates.
Norway's central bank became the first European central bank to raise the key interest after the crisis. On October 28, it increased its deposit rate by a quarter point to 1.50%.
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