There was a split decision by Europe’s central banks today, with the Bank of England lowering rates 25 basis points, and the European Central Bank standing pat but suggesting that it will ease if necessary too.
At today’s meeting, the Governing Council of the ECB decided that the minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.00%, 5.00% and 3.00% respectively.
However, the Bank of England’s Monetary Policy Committee voted to reduce the official Bank Rate by 25 bps to 5.25%. It noted that the prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. While UK inflation is currently near the target, the Bank warned that it may be set to spike in the months ahead.
CIBC World Markets said that the Bank of England decision was expected. “The accompanying statement confirms a still very cautious mood on the MPC, with increased downside growth risks obviously acknowledged, but inflation remains a concern at this stage,” it says.
“Overall, this does not sound like a central bank in a particularly dovish mood at this stage,” CIBC concludes. “Which is consistent with our view that the BoE monetary easing will be of a gradual nature this year, with a 25 bps rate cut per quarter approach likely to be favoured as the economy decelerates below trend and upside inflation risks gradually recede. We expect the next rate cut in April or May depending on how quickly UK indicators deteriorate.”
While the European Central Bank left rates unchanged, National Bank Financial noted that it emphasized the downside risk to Eurozone growth in the months ahead; which it sees as the equivalent of an easing bias.
In the meantime, NBF reports, the global policy rate – a weighted average of the main central banks’ benchmark rates – is down to 3%. “Importantly, the global policy rate adjusted for 12-month headline CPI inflation in the G7 countries is negative for the first time since in three years,” it says. “Negative real interest rates have generally been a potent elixir against a protracted economic slowdown in the past. There may still be a lot of uncertainty regarding the impact of a U.S. recession on the global economy, but the good news is that central banks are responding.”