Carney And Draghi To Step Up

Today is a very important day for monetary policy both here in the UK and the Eurozone, with markets creeping lower yesterday as investors found themselves not wanting to be caught without a swimsuit if the tide goes out.

Here in the UK, the Bank of England meeting would normally be the headline grabber, even if, as is the case today, we expect no change in interest rates or asset purchases from the Monetary Policy Committee. However, at 9.45am we finally are able to sit and obtain some clarification from the future Governor of the Bank of England, Mark Carney. As we said yesterday this is Carney’s first proper sit-down in front of the UK’s Treasury Select Committee since taking the job of BOE Governor.

What we are hoping to learn from him is whether the sea-change that most expect Carney to bring to the Bank of England will actually come to pass. Does the Bank’s remit on controlling inflation need changing alongside the tools it can use, like forward rate guidance? How bad does the UK economy have to be for a policy shift to occur?

At his Davos speech questions from journalists were prohibited, but we did see him butt heads with the OECD’s Angel Gurria over whether monetary policy can be made looser globally and what effect it can have. Questions should be forthcoming on that and we would suspect that opposition members of the TSC may want to make Osborne’s man’s first appearance a testing one.

What we do know already is that GBP has slipped lower during his previous speeches as the market makes plays on his inherent dovishness; there is little to suggest a similar thing will not happen this morning. In fact, we believe that this is the reason for sterling’s weakness through the past 48hrs.

The ECB decision is also likely to show no change in monetary policy and the following press conference will be focused largely on the increase in the value of the euro in recent weeks, following the “normalisation” of financial conditions in the Eurozone that Draghi spoke off last month.

The political back and forth over the exchange rate increased yesterday, following Francois Hollande’s request for an “exchange rate policy” for the Eurozone. A spokesperson for Angela Merkel said yesterday that the “euro appreciation is not a bad thing” and fobbed off the French President’s plans as ineffectual. This will all end in tears we think although the market’s reaction was one of ambivalence; they are happy to wait for Draghi’s pronouncements this afternoon.

As we have stated before, the euro is not at particularly high levels against long-term averages but then again, it’s not like the Eurozone is enjoying economic productivity at long-term average levels either. Measures to bring the euro lower are not the kind of policy that central banks tend to apply to the growth crisis that the region finds itself in. It’ll be interesting to see how Draghi handles this one.

We also expect Draghi to take questions on last night’s emergency liquidation of Anglo-Irish by the Irish parliament last night, as it attempts to renegotiate its debt repayments with the ECB.

Today’s webinar will take place at 14.00 GMT and summarise all the above plus outline why January has been the worst month for sterling since the days of 2008 and the Lehman crisis. We will argue in our presentation why it is not warranted and why the euro cannot hold on to these gains in the short term. We will also look forward to the Italian election and outline what we think Mark Carney will bring the Bank of England when he takes over from Mervyn King.