Markets Are Up Ahead Of Two Big Central Bank Announcements

Markets are modestly in the green early in the European trading session.

Britain’s FTSE 100 is up 0.3%.

France’s CAC 40 is up 0.2%.

Germany’s DAX is up 0.4%.

Spain’s IBEX is up 0.7%.

Italy’s FTSE MIB is up 0.8%.

There’s a lot of talk coming out of the world’s central banks this week. Later this morning, the European Central Bank and the Bank of England will update us on their positions on monetary policy. Economists expect both banks to keep policy easy and rates unchanged at extraordinarily low levels.

Some economists expect the ECB to get more aggressive as inflation continues to be below target and unemployment remains painfully high.

Here’s Societe Generale’s previews for both meetings:

Bank Of England

In this first MPC meeting of 2014, the Committee will take stock of the radically improved state of the economy over the past year. Just over a year ago, in the November 2012 Inflation Report, the MPC predicted 2013 growth of 1.2% but then downgraded that to 0.9% in February 2013 but since then its 2013 forecast has been steadily increased to 1.6%. However, far more dramatic has been the increase in the 2014 forecast from 2.0% to 3.4% from November 2012 to November 2013. This states most eloquently just how much more optimistic the MPC has become about the outlook. But should that raise concerns about inflation pressures? Not in general – at the same time, the inflation performance has improved. The rate of inflation has fallen 2.1% yoy. This takes some of the pressure off the MPC to tighten policy.

European Central Bank

After much talk of the ECB’s remaining options, expectations have settled down following the December meeting. Unless we see outright deflation risks, we expect no major changes in standard policy measures in the short term. Instead, the focus is likely to be on liquidity supporting measures, with focus turning increasingly to the Comprehensive Assessment (CA). While significant gains are possible from breaking financial fragmentation, we are concerned with the latest proposals for the Resolution Mechanism, in particular the lack of capital backstops which ultimately may compromise the credibility of the CA. The risk of fragmentation continuing after 2014 thus remains high. The January Governing Council meeting is likely to take stock of these challenges, while keeping policy rates unchanged.

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