Thursday has the potential to be another interesting day in the markets, with interest rate decisions due from both the Bank of England and the European Central Bank.
It’s not often that we hear from two major central banks on the same day, let alone around the same time, but when we do there’s always the potential for some turbulence.
Both central banks are in the early days of their respective tightening cycles, with the BoE having recently raised interest rates above 0.5% for the first time since the financial crisis and the ECB drawing its quantitative easing program to a close at the end of this year.
While there’ll still be plenty of cash sloshing around the financial system until they start the process of reducing their balance sheets – as the Federal Reserve is currently experimenting with – the moves being undertaken represent a very cautious and gradual tightening that traders are monitoring very closely for any signs that they may lose their nerve.
This is particularly true in the current environment with the UK and EU locked in Brexit negotiations as the 31 March deadline draws ever near. Protectionism is another key risk factor with US President Donald Trump threatening tariffs on the block. Add to that the struggles being experienced in emerging markets at the moment and the jobs of the central banks become that much harder.
We already appear to be seeing a slowdown in numerous economies across Europe due to a combination of these factors, something the central banks don’t appear too concerned about just yet but may do should they persist.
My expectations are actually quite low for the meetings. The reason why is that it seems to suit both central banks to stay under the radar for now. Both have made important first steps towards normalization and are in no rush and with Brexit on the horizon, now is not a good time to be changing course, especially as they don’t have to.
Both have laid out quite clear plans for the next year and even if they don’t stick to them – which there’s a good chance they don’t given the amount of unknowns and risks – the important thing is that investors are largely on board and the economies are doing ok. I don’t think they’ll want to mess with that.
So I don’t expect any changes in interest rates or QE this month and we can probably expect ECB President Mario Draghi’s press conference to be a rather dull affair.
