The European Central Bank will likely hold rates on June 4 but venture into 'quantitative easing,' or boosting the money supply by buying bonds
The European Central Bank is expected to reveal a departure in monetary policy this week and pursue its own version of quantitative easing, the so-called printing money option, to try to fuel a recovery in the ailing eurozone economy.
Details of the step-change in its monetary policy are expected on Thursday, the same day that the ECB and the Bank of England's Monetary Policy Committee make their latest decisions on interest rates. Ahead of the MPC's widely-anticipated decision to keep UK base rates pegged at a historic low, a fresh economic survey published today lends further support to an improvement in conditions on these shores. City analysts expect the ECB to leave interest rates on hold at 1.5 per cent, but provide details of plans to purchase €60bn (£52.5bn) of "covered bonds" – asset-backed securities that stay on the books of issuers.
The ECB hopes the purchase of covered bonds will make it easier for private companies to raise money through the issuance of bonds and help the banking system to lend to individuals and businesses. The 16-country eurozone's private sector relies heavily on manufacturing and exports, especially in Germany, which has been badly hit by a downturn in global trade.
The MPC is widely tipped to keep interest rates at 0.5 per cent this week and press on with its £125bn programme of quantitative easing (QE). Observers will look for hints, in any accompanying statement, that the Bank Governor Mervyn King will ask the Chancellor for an extension to the current maximum budget of £150bn for QE. In May, the Bank extended its QE programme by £50bn to £125bn.
Further signs of the positive contribution QE is having on the economy came from BDO Monthly Business Trends Indices today. The accountannt BDO Stoy Hayward said its latest data for May suggested the UK was at "an inflexion point in the economy". In May, the BDO output index, which forecasts economic output over the next three months, rose to 92 in May, up from 90 in April – the largest monthly gain since February 2004. This suggests that while the economy will still contract by 0.3 per cent over the three months to 31 August, this will be a strong rebound from the 1.9 per cent slump in the first quarter. A figure of 95 on the index, which measures short-run turnover expectations and order book strength, signals a recovery, while 100 on the index equates to annual GDP growth of 2.5 per cent.
The BDO Optimism Index, a measure of business confidence and forecast of economic growth over the next six months, also rose to 91.5 in May from 91.2 last month. Peter Hemington, a partner at BDO Stoy Hayward, said: "These figures are good news but we can't call the end of the recession yet." BDO's Inflation Index also rose to 93.5 in May, from a record low of 85.9 in February, following a reversal in sharp falls of oil prices, sterling and growth.