The Bank of England and ECB meet tomorrow to decide on interest rate changes. It is expected that UK rates will drop by probably another 0.5%. UK Economic data since the last meeting has continued to show a sharp downturn. Crucially, Mervyn King said in a speech about two weeks ago that “Despite those big (interest rate) cuts, there remains a risk that inflation will fall below 2%.” In our view, he was indicting the balance of risks will remain in favour of another 50bps cut this month to bring the rate to 1.0%.
As for the ECB rates – it looks likely that they will stay on hold on Thursday.
In the press conference after the last meeting 3 weeks ago) – Jean Claude Trichet more or less ruled out a further cut in February but he said that the March meeting would be “important”.
At the March meeting, the ECB council will have the revised ECB forecasts for growth and inflation, which are likely to be revised downwards from the last set of forecasts in December. Because of this – it is expected that the ECB will hold off on any changes to rates until they have those revised forecasts .