Sometimes central bankers need to take a break, crisis or no crisis, and it appears that break will come this week.
Few economists think the European Central Bank and Bank of England meetings will produce fireworks. The ECB cut its rates in July and is unlikely to do so again, especially with inflation running stubbornly above the 2 per cent target, and rising.
The Bank of England probably will leave rates unchanged, too and is unlikely to try to pump up the economy by boosting is asset-purchase program, if only because not much has changed in the last month. Britain is still in recession, but the new revisions to the economic data suggest the downturn is not as deep as feared. Britain’s Office for National Statistics recently said gross domestic product fell an estimated 0.4 per cent in the second quarter, somewhat less than the 0.7 per cent contraction in the initial estimate.
The ECB appears to be in wait-and-see mode. It is waiting to see if Spain will ask for a bailout, and will see if the euro zone economy sheds any more momentum before deciding to cut its rate again.
At its previous meeting, in early September, the ECB was the hottest show on the planet. That’s when ECB boss Mario Draghi rolled out OMTs – outright monetary transactions – which is painfully awkward banker speak for the purchase of sovereign bonds. He did so in an apparent last-ditch effort to spare the euro from oblivion, as Spain’s economy and finances unwound at alarming speed. Since then, there has been relative calm in the euro zone.
On Thursday, when the ECB meets, Mr. Draghi cannot announce that the purchases have started because the institutional machinery to do so is still not in place, and because the ECB will only swing into action after the European Stability Mechanism, the new bailout fund, which also is not yet in place, delivers a financial-aid package to the distressed country. And that can happen when the country asks for help.
“Simply put, the ECB is stuck, and we cannot think of a single policy adjustment it can make at next week’s Council meeting that would make any difference to Euroland’s composite woes,” Carl Weinberg, chief economist at High Frequency Economics, said in a Friday note.
Mr. Draghi, however, may be tempted to reveal more details about the workings of OMTs. At the last meeting, he delivered a rudimentary outline.
For both the ECB and the Bank of England, inflation is a concern. As energy prices soared in August and September, euro-zone inflation has accelerating, hitting 2.7 per cent in August, year on year. While core inflation is probably much lower, the ECB is under pressure from Germany and other inflation-wary northern countries to remember that maintaining price stability is its chief function.