The start of the week was calm in markets, but nearing the end, the
BoE and ECB dominated the scene with the interest rate decision to
finally conclude the week with inflation data from Europe that singled
rising threats in the region.
*Germany Growth*
Germany enjoyed a better than expected expansion in 2010, marking the
fastest expansion rate in nearly two decades as exports increased,
leading to a general rise in hiring rate by German firms and improving
consumer spending in the country.
According to the Federal Statistics Office, the German economy
expanded at an annual base of 3.6 percent, which is consistent with
market expectations, while compared with the previous slump of 4.7
percent that was recorded a year earlier.
Meanwhile, the government suffered from a budget deficit of 3.5
percent of GDP according to the report. The debt crisis in Europe
continue to hammer down activities, which led earlier the Bundesbank
(Germany's Central Bank) to lower its growth forecasts for the
upcoming period, reaching 1.5 percent in 2012 as demand drops.
*BoE and ECB Preserve Monetary Stance*
Bank of England's Monetary Policy Committee left its key lending
rate unchanged at a record low of 0.5% and the bond-purchase program
also on hold, in line with market expectations. With that, policy
makers near two-year of record low interest rates.
The bank did not hint for a possible interest rate hike or tightening
its policy due to elevated unemployment, high inflation levels, huge
budget deficit and sovereign debt problems that hammered activities in
the region over the past period. Thus, the bank is still committed to
its dovish stance, rather than focusing on inflation and changing its
policy as King and the majority are offsetting Sentance's calls and
acting preemptively to prevent the economy from a relapse as the
spending cuts take effect.
The Center for Economic and Business Research (CEBR) said Friday that
the British economy faces 20.0% chance of falling back into recession,
on rising unemployment and accelerating inflation levels that continue
to affect the ability of the economy to recover.
Britain's economy will grow by 1.1 percent in 2011, according to
CEBR, down from the previous estimates of 1.3 percent that was
projected in October. CEBR also projects that the BOE will expand its
APF purchases, depending on the drop of inflation that currently
stands at 3.3 percent, which is higher than the government's upper
limit of 3.0 percent.
CEBR estimates for 2010 growth levels are set at 1.8 percent, while
the economy to expand in 2012 by 1.5, as for inflation, the group
projects that inflation would spike at 4.0 percent this year, before
dropping to 1.6 percent by the second half of 2012.
The European Central Bank released Thursday its key lending rate which
was preserved at 1.0%. The decision was widely expected, while ECB
President Jean-Claude Trichet held a press conference to answer
questions and provide markets with the bank's outlook and monetary
stance.
Trichet started the press conference with the usual comment as
"rates are appropriate" while noting that there are evidence of
short-term upward inflation levels, therefore the ECB will continue on
monitoring inflation levels over the upcoming period. Meanwhile,
inflation outlook over the medium-term remains "Firmly Anchored,"
according to Trichet.
The economic outlook is tilted to the downside, with uncertainty
prevailing, related to financial market tension and the rise in energy
prices are among the major factors that drives the upcoming risks to
the economy.
German Federal Statistics Office report for Consumer Price Index
showed that prices surged to the fastest pace in more than two years
last month, driven by the rise in commodity prices. The Statistics
office noted on December 29 that 2010 inflation levels was "driven
by price rises in light heating oil and fuels, as well as in fruit and
vegetables."
The Harmonized Measure, the official gauge for inflation in Germany,
rose by 1.9 percent during December. UK producer Prices increased more
than market expectations to 0.5%, from November's figures were it
increased by 0.4%. This report puts more pressure on BoE to contain
inflation in the country.
The Core CPI index in the euro-zone showed that prices rose by 1.1 in
the month of December, in line with the previous and the expected.
Meanwhile, the CPI index rose by 0.6% over the monthly basis as
expected, from November, where it rose by 0.1%. on the yearly scale
the index rose by 2.2%, this is compared with the previous revised 1.9
percent.
The report place huge pressure on the ECB; where Trichet noted
yesterday that the bank will not hesitate to increase interest rates
in order to contain inflation threats, which would tamper the recovery
process.
Source: Fxstreet.com
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