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Central Banks to Keep Steady Hands on the Tiller

Sunday, 28 July 2013 02:18 PM EDT

Three of the world's leading central banks are likely to reaffirm their determination this week to keep a lid on interest rates for a long time to come, despite signs that their economies are slowly on the mend.

The Federal Reserve, the European Central Bank and the Bank of England are all expected to repeat or refine their "forward guidance" that borrowing costs will remain extraordinarily low as long as growth is sub-par and inflation is not a threat.

Fed Chairman Ben Bernanke's news conference after the U.S. central bank's policy meeting will come in for particular scrutiny for fresh clues over the timetable for phasing-out the Fed's bond buying, running at $85 billion a month.

Bernanke has said the Fed is likely to begin reducing its purchases later this year - markets have penciled in a September start - and end them completely in mid-2014, depending on the economic news flow.

No figures are more important than the monthly employment data and Friday's report is likely to show the economy added 185,000 jobs in July, just shy of the 200,000 average of the past nine months, according to economists polled by Reuters.

Joseph Carson, chief economist with AllianceBernstein in New York, said that pace should be at least sustained in coming months, as job growth in services was being reinforced by strength in construction and an improvement in manufacturing.

Second-quarter GDP figures on Wednesday are forecast to show the economy expanded at an annual rate of 1.0 percent, just half as fast as in the first quarter, but Carson expects an acceleration to between 3.0 and 3.25 percent in the second half of this year and to 3.5 percent in 2014.

Although the recovery has just marked the end of its fourth year, it looks in many respects as though it is just getting under way, Carson said.

"We're getting the early-cyclical industries from autos to housing starting to provide leadership. We're starting to get the labour markets improving. And we have low inflation, which is always a feature of the early stages of a cycle," he said.

 

MANUFACTURING SIGNS

What's more, consumers and companies are in good financial shape. "Wealth is at an all-time high, leverage is low in the household sector and businesses are flush with cash," Carson added.

Carl Riccadonna at Deutsche Bank in New York said the Institute of Supply Management's monthly survey would be critical for assessing the economy's momentum and corroborating recent positive signs from regional manufacturing surveys and, notably, a growing backlog of orders for durable goods.

"This is an encouraging development, because as unfilled orders accumulate, businesses tend to become more confident with respect to hiring, investment and production plans," Riccadonna said in a note.

Deutsche expects GDP growth to accelerate to a 3.3 percent pace in the second half of 2013, as fiscal headwinds fade and housing continues to gather strength.

The euro zone is also hoping for a better end to the year, after last week's purchasing managers' surveys showed the economy is bottoming out after six quarters of contraction.

A batch of European sentiment indicators on Tuesday should confirm the modest improvement.

However, with unemployment forecast to have stayed at a record high of 12.2 percent in June and inflation expected to come in below target at 1.6 percent, ECB President Mario Draghi is likely to reiterate that interest rates will stay at present or lower levels for an extended period.

Grant Lewis, an economist with Daiwa Capital Markets in London, does not expect another reduction in the ECB's main policy rate, already at a record low of 0.5 percent, but said the balance of risk was skewed towards a cut rather than a rise.

"Remember inflation is incredibly low and the risks are firmly on the downside," Lewis said. He described last week's weak bank lending figures for the eurozone as abysmal. "The need for more stimulus may well materialise."

Of 70 economists polled by Reuters, only a quarter expect another rate cut. Only one thought the ECB would act this week.

The Bank of England is also expected to remain firmly on hold - although it might issue another dovish statement - ahead of its next quarterly inflation report on Aug. 7.

That will provide a peg for new Governor Mark Carney to spell out, as Bernanke has done, what conditions would have to be met before the central bank dials back its bond buying and looks ahead to when record-low interest rates will start to rise.

The hope is that a pledge that increased borrowing costs are a long way off will be enough by itself to water the green shoots of recovery.

"In the first instance they will view forward guidance as providing more stimulus, whichever intermediate targets they're going to choose," Lewis said.

© 2024 Thomson/Reuters. All rights reserved.


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Central Banks to Keep Steady Hands on the Tiller
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2013-18-28
Sunday, 28 July 2013 02:18 PM
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