Economic indicators still suggesting MPC / ECB caution
Simon Ward
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The MPC voted 8-1 for unchanged rates at this month’s meeting, a less dovish outcome than forecast by my MPC-ometer. However, the minutes suggest greater concern about a weakening economy than poor near-term inflation prospects, while some members appear to have delayed voting for a cut in order to avoid back-to-back moves and because of the imminent February forecasting round. A reduction looks highly likely next month but economic and financial indicators would have to deteriorate dramatically over the next two weeks to generate an MPC-ometer forecast of a 50 bp move.
The Eurozone purchasing managers surveys weakened slightly further in early January – see chart. Feeding the relevant components into my ECB-ometer model produces an average interest rate recommendation of -2 bp for the February ECB meeting – consistent with a shift to a mild easing bias but insufficient to generate a forecast of an actual rate cut (see here and here for more explanation of the model). The Governing Council is likely to issue a more balanced policy statement at the next meeting but it may be several months before a consensus forms in favour of lower rates.
Of course, both the MPC and ECB could be forced to accelerate action if equity markets continue to spiral lower.
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