BOE to surprise; ECB to keep us waiting?

More Nick Beecroft, 3 days ago07 December 2011 Non-Independent Investment Research

Today sees monthly meetings of the monetary policy committees of both the Bank of England, (BOE), and the European Central Bank, (ECB), and my feeling is that any surprise is more likely to come from the former.

UK Chancellor's Autumn Statement sets the scene
Chancellor Osborne's recent deeply gloomy Autumn Statement with its forecasts of reduced growth, and demands for austerity as far as the eye can see, (all backed up by the analysis of the independent Office for Budget Responsibility), set the scene for today's BOE Monetary Policy Committee, (MPC), meeting and there is a very good chance that the 'reward' for the Chancellor's fiscal rectitude will be the announcement of yet more Quantitative Easing, (another $75bn?).
Dismal October Industrial Production figures this week support the fear that the UK economy will move into recession this quarter and may just tip the balance to move the MPC to action.
The only argument against the announcement of additional QE today may be a desire by the MPC to see what unfolds in the Eurozone over the next critical few weeks. On the one hand there may be a desire to 'keep powder dry', in case disaster strikes across The Channel or, on the other hand, a desire to coordinate with the ECB if it too decides to join the QE party properly. I would expect the Committee to leave base rates unchanged at 0.5 percent.

ECB to wait for confirmation of its quid pro quo
To judge by the market's ebullient mood this week, the order of affairs is set in stone.

1) this week's EU summit will announce a move towards just enough fiscal union or fierce enough legal measures to ensure future obedience of new draconian fiscal rules imposed by Brussels and 2) the ECB will ride to the Euro's rescue by agreeing to buy virtually unlimited amounts of Eurozone periphery debt-ie full-blown QE.
However, 'there's many a slip twixt cup and lip' and this cosy arrangement has many complex pieces which could obstinately fail to fall into place.
Notwithstanding the question of whether the ECB will get its pound of flesh, it seems highly unlikely that it will act 'on faith' today and announce QE in advance of politicians' signatures 'in blood' on documents enforcing the requisite fiscal discipline.
On the other hand, I do expect the ECB to reduce its main Refinance Rate by 0.25 percent to 1.0 percent, with a 20 percent chance of a 0.50 percent cut.

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