Fed and ECB go their
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[March 03, 2017]
By Balazs Koranyi
(Reuters) - Two of the world's biggest central banks are likely to find
themselves with a bigger policy gap by the end of the coming fortnight
The European Central Bank on Thursday will resist calls to start
tightening policy against surging inflation but robust U.S. jobs data on
Friday could seal the case for another Federal Reserve hike the week
So, let's say minus 0.4 percent rates in Europe and more than 0.75
percent in Washington.
With just weeks to go before contentious French and Dutch elections, the
ECB will be keen not to rock the boat, so it is likely to give just a
token nod to robust growth figures, steering clear of any policy hint
that may give emerging populist movements ammunition.
A Reuters poll showed unanimity for no change. [ECB/INT]
But the balancing act may be more difficult than it looks.
With growth on its best run since before the financial crisis and
inflation peeking just above the ECB's target, calls are mounting,
particularly in Germany, for the bank to scale back its 2.3 trillion
euro ($2.42 trillion) bond buying scheme and raise its negative interest
Doves hold a comfortable majority among the policymakers, however, so
any shift will come at the margins. In practice that could mean
increased inflation forecasts, letting an ultra-cheap lending scheme to
banks expire as scheduled, and dropping a reference to the risk that
growth may disappoint.
Still, ECB President Mario Draghi will probably avoid any discussion
about winding down asset buys, even pushing back on calls by some rate
setters to tweak the ECB's guidance, giving up its reference to further
rate cuts, a possibility markets have already priced out.
"If the French presidential election also passes without turbulence, and
growth and inflation data remain solid, the ECB might turn more hawkish
in its meeting on June 8," Reinhard Cluse, economist at investment bank
UBS, said. "This would then leave the meeting on July 20 for preparing
the markets for the tapering (off asset-buying) on September 7."
For now though, Draghi will stick to his line that the inflation surge
is temporary, growth is fragile and political risks clouds the outlook,
requiring stimulus, a Reuters poll of analysts showed.
Having tightened policy in 2011 just months before the euro zone debt
crisis started spiraling out of control, the ECB will be desperate not
to move too early, even if it risks being called out by some for moving
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The United States Federal Reserve Board building is shown in
Washington October 28, 2014. REUTERS/Gary Cameron
The Fed, meanwhile, must deal with what Draghi dubbed a high-class problem:
solid growth, full employment and returning inflation.
Non-farm payrolls, due on Friday, are expected to show an increase of 186,000
jobs, probably enough to push the Fed to move. Unemployment benefits already
fell to near a 44-year low late last month, indicating further tightening of the
Indeed, markets have now almost fully priced in a hike in March, the third since
rates bottomed out at the height of the crisis, and two more increases could
still come before the end of the year.
jobs growth threatens to overheat the labor market, just as inflation is heading
higher, with the Fed's preferred measure now in the upper end of the range
central bank officials in December estimated would be reached this year.
Manufacturing growth is also firming, offsetting relatively weak consumer
demand, good enough for even the most dovish Fed officials to argue for a hike
sooner rather than later.
Soothing global growth fears, meanwhile, China is expected to report another set
of strong figures for both exports and imports, indicating that even if overall
growth is slowing and debt is rising fast, the slowdown remains under control,
mitigating the risk for emerging market economies.
Indeed, China's factory activity expanded faster than expected in February,
firming arguments for the central bank to raise short-term interest rates by a
another 10 basis points as soon as March.
Data due on Wednesday are expected to show Chinese exports up by 10 percent in
February while imports could have risen by 20 percent, a boon for countries like
Australia, which supply China with raw materials.
Indeed, the Reserve Bank of Australia may signal on Tuesday that policy easing
is done, given the economy's convincing rebound last quarter, rising commodity
exports and a robust increase in household debt levels.
(Editing by Jeremy Gaunt)
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