Europe Ahead: BoE and ECB to hold their monetary stance unchanged in January

Today, eyes will be directed towards rat decisions in the European
continent as the two key central banks, BoE and ECB, will announce
their monetary measures for the first month of 2011.

Starting with the BoE, expectations refer to holding both interest
rate and APF quantity unchanged in January, probably till the release
of more update about the status of the economy through the release of
new data and after seeing the impact of new austerity measures and
rise in VAT.

At the end of last year, we have seen a split among BoE members over
the suitable monetary policy to shore up the economy that is still not
out of the woods yet.

MPC member Andrew Sentance resumed his call for an interest hike to
0.75 percent and preserving the APF facility putting an eye lid on
inflation while Adam Posen called for £50.0 billion increase in the
APF to £250 billion and voted for steady rates at 0.50% to prop up
recovery, as reported by BoE minutes for December's rate decision.

Thus, the contradiction between growth and inflation is the main
reason behind the split as with inflation holding above the upper
limit since February and growth slowed in the third quarter to 0.7%
from 1.1% in the second quarter the trade off is very clear.

However, expectations refer that the possibility of raising interest
rate is higher than expanding APF as Cameron expressed his worry about
inflation, confirming that the spending cuts by the government will
not affect growth and raising interest rate by small amount will not
weigh on growth.

In the euro zone, the ECB will probably leave borrowing cost steady at
its low level to boost growth that also eased in the third quarter,
where the recent information noted that the ECB had bought Portuguese
bonds to help the debt-laden economy, yet that decision was met by
criticism as it was said it will affect yields, thereby causing
instability in markets.

Portugal sold 4-year and 10-year bonds yesterday, while Spain and
Italy will sell long-term bonds today.
The recent announcements from China and Japan that they will buy
European bonds mitigated tensions a little bit, yet European debt
crisis remain persistent with the growing possibilities that Portugal
may ask for a bailout.

The new thing this month for the ECB is the unexpected rise in
inflation to 2.2% in December which if increased more over the coming
few months may prompt policy maker to intervene.
But Trichet mentioned that the region will not suffer from high
inflation and prices that were mainly triggered by the jump in oil
prices above $90 a barrel will not continue to rise above the
target.
Source: Fxstreet.com