BoE, ECB in Focus as Economic Outlook Darkens

Today's key central bank decisions from the Bank of England and European Central Bank shall draw scrutiny market. Both set to remain unchanged, but the ECB could adopt a more dovish outlook at its press conference. Australian unemployment rises, Japan trade surplus shrinks.

Recent lacklustre economic data in the UK has prompted a lot more dovish speculation as to the next steps that the Bank of England might take with respect to additional stimulus measures for the UK economy.

Yesterday’s disappointing manufacturing and industrial production data for July has reinforced perceptions that Q3 growth could well contract, and prompted further calls from arch dove Adam Posen for further stimulus measures of around £50bn to help stimulate the UK economy.

While the calls for these measures are starting to become more strident and audible, including a call from the Institute of Directors, they are unlikely to happen today given the mathematics involved on the committee, but also due to the current high level of inflation.

Not only four members would have to become dovish, but also switch over to actual rate cuts. Yet, given that inflation in the UK could well rise further given that energy prices rises have yet to filter through, it could well prove unwise to risk further price rise pressures by weakening sterling and pushing imported inflation higher.

On the other hand, the committee could well think that higher inflation is a price well worth paying, however it is by no means certain that further fiscal measures would work, given the forces at play in the UK economy.

Later on the European Central Bank also starts its deliberations on interest rates and like the Bank of England it is also likely to keep policy unchanged. Recent deteriorations in economic conditions in Europe has highlighted the folly of the previous ECB rate hikes this year in precipitating recent upward pressure in bond yields across peripheral Europe, as well as choking off economic growth.

The markets focus is going to be more on President Trichet’s press conference in light of his comments at Jackson Hole, about reviewing the pressures on price stability the focus will be on how dovish he is in his language, and the likelihood of possible hints about rate cuts by year end.

In Australia the latest employment report for August showed that unemployment rose by 9.7k, confounding expectations of a drop of 10k and the unemployment rate rose unexpectedly to 5.3% as recent market turmoil appears to have hindered jobs growth in the Australian economy.

In Japan the latest trade balance numbers unexpectedly shrank sinking to a surplus of 123.3bn yen from 149.1bn yen in June, showing that the economy continues to struggle to recover from the effects of the events of earlier this year in all likelihood due to its a stronger currency. To reinforce concerns exports were down 2.3% from July 2010, while imports were up by 13.6%.