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Shrewd Investors Focus on ECB and BOE Monetary Decisions
Starting first with the ECB, the bank is predicted to hold its monetary policy thismonth, probably waiting for the latest developments in the euro area amid theefforts by European officials to resolve the three-year-old debt dilemma.
The bank will hold interest rate at 0.75% and will refrain from announcing anotherround of cheap loans to banks, according to median estimates.
Draghi said last month the worst of the debt crisis may be over, stating the “darkestclouds” have lifted. He referred to the improvement in financial markets thatappeared clearly with the drop in Spain`s bond yields yet he mentioned still theeconomy has to show signs of progress on the macroeconomic level.
Data released last week showed restored confidence in the euro area, whereeconomic confidence surged to 89.2 in January, the highest since June, from arevised 87.8 in December as European officials stepped up their efforts to resolve crisis.
This week, specifically on Feb. 7-8, EU 27 leaders will gather again in Brussels inhopes to strike a seven-year budget deal; they will try to come out with a plan ofnearly 1 trillion for the EU from 2014 to 2020.
On the economic perspective, the euro area is still in recession and may continuein contraction in the final three months of 2012, while unemployment is still high(11.7%), where progress is expected to take place later in 2013, particularly in thesecond half of the year, according to Draghi.
The euro area will record a contraction of 0.2% this year, instead of previousforecasts of 0.1% expansion, according to the IMF.
By looking at the latest developments in inflation the rate has receded to 2.0% inJan., in line with the bank`s target; hence, there are no inflationary concerns in themeantime, where the ECB predicts inflation to fall below 2.0% target in 2013 tomove in a range of 1.1% to 2.1%.
Thus, the main focus in the coming period for the ECB will be directed to shoring upthe economy to exit recession.
Moving to the U.K., the situation is worrying as the economy is in the throes ofexperiencing a triple-dip recession after GDP for the last three months of 2012(advanced reading) showed a drop of 0.3%, from an expansion of 0.9% in the third quarter.
The latest anticipations by the IMF slashed growth forecasts for the U.K. by 0.1percentage points to 1% this year and by 0.3 percentage points to 1.9% next year.
The sharp austerity measure remains a major threat to the U.K. recovery, especiallyafter Chancellor of the Exchequer George Osborne said in his Autumn Statementthat austerity measures will have to be maintained for longer period that previouslyanticipated and debt will start dropping a year later than predicted.
Inflation, on the other hand, remained at 2.7% in Dec. on higher gas and electricitybills, raising expectations prices would remain above the BOE`s inflation target thisyear, where the Bank of England has forecasted that inflation will drop gradually this year.
King said “there are certainly aspects of the inflation-targeting regime to consider,”yet his view remains that a long-run 2% inflation target “should be an essential partof our macroeconomic framework,” with some flexibility in periods of slowdown.
Hence, the BOE is estimated to leave both interest rate at 0.50% this month andasset purchases of 375 billion pounds, where the BOE referred previously thatFunding for Lending (FLS) program is showing "encouraging" signs and is likely toremain BOE`s favorite policy tool to bolster credit to households and businesses, asthe central bank relies on it to sustain the recovery.