Economic focus turns to monetary policy this week as the Bank of England looks set to announce further quantitative easing, while the Reserve Bank of Australia is expected to cut rates.
Although the most recent data from the UK have indicated that economic activity so far this year has improved following the 0.2 per cent contraction in gross domestic product seen in the final quarter of 2011, the Bank is broadly expected to lift its asset purchases by a further £50bn on Thursday.
Monetary Policy Committee hawks are unlikely to speak out against such a move given the sharp fall in inflation in December. Meanwhile, wage growth is subdued and consumer confidence remains capped by fears of rising unemployment.
“Despite an apparent pick-up in services and manufacturing in January, there are compelling reasons for the Bank of England to administer further stimulus for the economy,” says Howard Archer at IHS Global Insight.
With the Australian dollar at a five-month high against its US counterpart and inflation well within the RBA’s target band of 2-3 per cent, the central bank is expected to cut its main cash rate by a quarter point to 4 per cent on Tuesday, having previously made quarter-point cuts in both November and December.
A cut, analysts believe, would further shore up the Australian economy’s defences against any fallout from the eurozone crisis.
“While markets have improved and the threat of a global financial meltdown has faded for now, global growth is still slowing and we favour a cut,” says Madhur Jha at HSBC.
The European Central Bank will probably keep its main refinancing rate at 1 per cent, but investors will be keen to learn more about the ECB’s measures last month to support the banking industry.
The long-term refinancing operation, which offered the banks €489bn in three-year loans, has helped relieve some of the tensions in global financial markets, particularly the eurozone debt markets. Mario Draghi, ECB president, is expected to announce that further support will be provided in the coming months, but will continue to resist calls for the bank to participate in government bond purchases.
Data this week include German and UK industrial production for December. Germany continues to be the primary engine of eurozone growth, and after November’s monthly fall of 0.6 per cent, investors will be looking for better news. The consensus expectation is for a flat monthly reading, but for the annual rate to be lifted to 4.1 per cent from 3.6 per cent in November.
Recent manufacturing surveys in the UK have been a little more positive and this is expected to have helped drag UK industrial production figures off the bottom of their recent range. Monthly industrial production is expected to have risen 0.2 per cent after November’s 0.7 per cent drop, while the annual level is seen rising to -2.9 per cent from -3.1 per cent.
Falling exports are expected to continue to cut into Germany’s trade surplus, which is forecast to have narrowed in December to €11bn, from €15.1bn in November. Meanwhile, the UK’s total trade balance is expected to remain in deficit, but to have narrowed to £2bn in December, from £2.6bn in the prior month.