Good morning,

EUR: How long and how wrong?

The European Central Bank meeting today should see interest rates remain unchanged but it is the quantitative easing program that markets are focused on. Currently, the bank buys around EUR60bn worth of bonds a month, both in the form of sovereign debt and corporate debt in a bid to stimulate inflation and growth within the European economy. Recent data suggests that now may be the time for the level of stimulus to be cut; this differs from what the Federal Reserve is doing in so much that QE will continue in the Eurozone well into 2018. We will find out by how much and for how long later today.

Expectations are that those purchases will be cut in half to EUR30bn and the plan will extend its purchases until September of 2018. Given that we do not believe that interest rate rises will occur until QE has been completely halted, a shorter time frame of more purchases will likely be viewed as more hawkish by markets and thereby provide more support to the single currency.

The decision on interest rates and QE will take place at 1245BST this afternoon with the press conference explaining the Bank’s thinking and its outlook for the future at 1330BST. .

GBP: Consensus beating

Sterling ran higher yesterday, buoyed by a stronger GDP report than the consensus of economists and analysts had expected. The UK economy was shown to have grown by 0.4% in Q3 from the preliminary estimate. There are always dangers in over interpreting a preliminary piece of economic news. The preliminary estimate is the most incomplete look at an altogether dubious reading of economic growth that we will see. That being said the beating of consensus forecasts has cemented the idea that the Bank of England will raise interest rates next week.

Following that GDP announcement the probability of a Bank of England rate hike in November now sits at 84.9%. We think that it remains a policy mistake to increase borrowing costs whilst the fundamentals of the UK economy remain in such a poor state but the desire for 2 way risk in sterling and a need to at least pay attention to inflation seems to have won out.

World First Bank of England Preview: A Winter Hike

The November meeting of the Bank of England’s Monetary Policy Committee is expected to see interest rates rise for the first time since June 2007. Since then, the Global Financial Crisis has come and gone, the iPhone has been launched and the world’s political axis has been rocked by Brexit and the election of Donald Trump.

An interest rate rise will not have these kind of effects, but there will be reaction in sterling, inflation, growth, the housing market, trade and the wider UK economy.
We will be putting on a webinar next Thursday morning, free to all, to preview the Bank’s decision and take a look at these individual effects while updating our predictions on GBP against other major currencies. You can register for the webinar here

For those that cannot make the time, the webinar will be recorded and released alongside the slide pack the following day.

The Day Ahead

The ECB meeting will dominate all markets today although both the Swedish Riksbank and Norway’s Norges Bank also decide on policy today. Neither are expected to drive much volatility.

The other fly in the ointment remains the Catalan situation with Spanish newspaper El Mundo reporting that Catalan Leader Puidgemont is preparing to declare independence today. A debate in the Catalan parliament on the Article 155 declaration will take place at 1500BST.

Have a great day

Jeremy Cook, Chief Economist