ECB expected to hold steady on interest rates

Investors will have plenty to chew on this week as they try to grapple with the fallout from the recent bout of market turbulence. In the eurozone, the European Central Bank’s decision on interest rates takes centre stage.

Most analysts expect the bank to leave rates unchanged at 4 per cent on Thursday in spite of a clear indication following its August meeting that it would raise rates.

Aurelio Maccario at UniCredit says some recent signs of softness in the eurozone economy would have been unable to prevent the telegraphed rate hike at this week’s meeting, if the credit crisis had not burst.

However, he believes persistent money market disruptions will keep the ECB on hold in the short run. Nonetheless, a sanguine view on the economy and a reiterated focus on medium-term inflationary risks will indicate that the central bank stands ready to resume tightening as soon as market conditions normalise,” he says.

Similarly in the UK, the Bank of England’s monetary policy committee is expected to leave UK interest rates at 5.75 per cent after its meeting on Thursday, eschewing the rate rise signalled in the central bank’s inflation report in August.

With the UK already operating above capacity, the Bank of England was set to raise interest rates to 6 per cent in the autumn in order to bring medium-term inflation back to its target,” says Diana Choyleva, economist at Lombard Street Research. But over the past two weeks the global credit crunch has done their job for them.”

In the US , Friday’s non-farm payrolls release for August will be closely watched for further signs of labour market loosening, following last month’s upward creep in the unemployment rate to 4.6 per cent.

Paul Ashworth at Capital Economics believes the unemployment rate will probably edge up to a 12-month high of 4.8 per cent because initial jobless claims have begun to rise in recent weeks, while on the hiring side the help-wanted and Monster job indexes have both weakened.

Mr Ashworth says the employment figures are bound to be pored over for any signs the recent turmoil in financial markets has already led to job lay-offs. However, he suspects the impact will be fairly minimal. It will probably take a few more months before most finance firms would be in a position to announce redundancies,” he says.

However, analysts believe the Institute of Supply Management surveys of the US manufacturing and services sectors – due on Tuesday and Thursday respectively – are more likely to show signs of a spillover from the financial markets. These are likely to soften slightly on the back of business confidence having been knocked by financial market turbulence,” says Philip Shaw at Investec.

ECB expected to hold steady on interest rates

Financial Times
9/2/2007 3:40:19 PM