LONDON, Oct 10 (Reuters) - The Bank of England delivers its latest policy decision today.
No move is expected so presumably there will be no statement but it will not be lost on the monetary policymakers that following similar inaction last month, interest rate futures spiked higher, reflecting ongoing doubts about the Bank's forward guidance that interest rates are unlikely to rise before 2016.
The pound took a knock yesterday after some surprisingly weak data, but it has still climbed nearly 8 percent against the dollar since early July. Taken together with market rates which are pricing in an upward move in official rates way before the Bank of England's best guess, there is some de facto tightening of policy to contend with.
In essence, the markets don't believe that unemployment will take the best part of three years to drop from its current 7.7 percent rate to 7.0 percent - the level below which the Bank has said it could consider raising rates. Inflation has also consistently exceeded its 2 percent target.
With total GDP still well below pre-crisis levels, there could be scope to grow further without generating more inflation pressures though no one is very confident about measuring the output gap.
The IMF's significant upgrade of UK growth forecasts this week merely serves to show how hard it is to predict what's coming next. Britain's independent Office for Budget Responsibility hasn't fared any better. So if policymakers aren't flying blind they've certainly got thick fog to contend with.
The data, barring the drop in industrial output yesterday, has continued to come in strong with PMI surveys and the British Chambers of Commerce's polling of members pointing to quarterly growth of 1.0 percent or more in the third quarter. Is there a gap emerging between the surveys and hard statistics or was yesterday's report no more than a blip?
The European Central Bank is also damping down prospects of near-term action - both Jens Weidmann and Benoit Coeure told us yesterday that there was no need now to offer new long-term loans to banks, with the former saying rising market interest rates were not necessarily a sufficient reason on their own to act.
Most of the action is in Washington, with G20 finance ministers and central bankers attending the IMF/World Bank annual meeting. Presumably the U.S. government shutdown and debt ceiling will be top of everyone's worry list.
The ongoing U.S. standoff is keeping markets subdued but no worse than that. The counterbalance to the U.S. fiscal standoff is that investors presume the Federal Reserve will keep its money taps fully open for longer. Having met so recently in Russia, the G20 ministers are unlikely to come up with much new.
Markets have been soothed somewhat by signs the U.S. Republicans are considering a short-term hike in the government's borrowing authority to buy time for talks on broader policy measures.
For the G20 communiqué, a German official said it would mostly be a 'copy-paste' job from the statement issued when officials last met in St. Petersburg. The IMF said yesterday that some European countries, notably France and Spain, could consider slowing their austerity drive due to lagging growth.
There could be trouble brewing in the Netherlands. Dutch finance minister and Eurogroup head Jeroen Dijsselbloem has ditched the annual IMF meeting in a last-minute effort to salvage a budget deal with minority parties to support an additional 6 billion euros in austerity measures next year.
Dijsselbloem was to represent euro zone countries in Washington so presumably the decision wasn't taken lightly.
Italy will sell up to 8.5 billion euros of treasury bills - a precursor to an auction of 6 billion euros of fixed-rate bonds and floating-rate certificates on Friday. Wednesday's seven-year syndicated sale drew robust demand, raising about 5 billion euros. Spain's 30-year syndication also sailed away. It has almost completed its 2013 funding needs.
On the data front, August industrial output for France, Italy and Greece are due after equivalent reports in Germany and Britain posted unexpected falls. Norwegian inflation numbers also bear watching after a surge in August to bang on the central bank's 2.5 percent target - way before that was expected - brought forward expectations of an interest rate rise.
Germany's Angela Merkel will open preliminary coalition talks with the Greens but the smart money remains strongly on a grand coalition with the centre-left SPD though not for several weeks yet. Merkel's CDU and the SPD are due to meet again next week with the latter in no hurry to back her again after its support was decimated during the 2005-09 grand coalition.
(Editing by Susan Fenton) Keywords: EUROPE/VIEW
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