ECB Seen Holding Off More Policy Accommodation: Global Economy

Policy makers at the European Central Bank convening this week will probably hold off taking additional steps to stave off the risk of deflation amid inconsistent signals on the direction of prices.

The Bank of England also meets as the U.K. remains on pace to become the fastest-growing economy of any Group of Seven nation this year. The gatherings of Europe’s central bankers come on the heels of Federal Reserve’s announcement last week that it will continue trimming monthly asset purchases, while keeping its benchmark interest rate at a record low.

In the Asia-Pacific region, China announces its trade figures and Australia issues employment data. In Latin America, Brazil will probably show annual inflation exceeded the central bank’s target for the 44th straight month.

Back in the U.S., the data flow ebbs after a busy week. A purchasing managers’ report is projected to show service industries grew at a faster pace in April for the second month.


-- The European Central Bank is projected to keep its benchmark interest rate at a record-low of 0.25 percent, where it’s been since November, according to the median forecast in a Bloomberg survey. All but two of the 58 economists project no change. ECB President Mario Draghi, who will hold a press conference after the May 8 meeting, received conflicting inflation signals last week.

-- Consumer prices in the euro area rose 0.7 percent in April from a year earlier, less than the median forecast in a Bloomberg survey, a European Union statistics office report showed on April 30. Core inflation advanced an as-projected 1 percent, up from 0.7 percent in the 12 months ended in March. The ECB, which seeks to maintain inflation just below 2 percent over the medium term, forecasts price growth at 1 percent this year, rising to 1.5 percent in 2016.

-- “A string of negative inflation surprises relative to ECB forecasts are likely to result in downgrades to the ECB’s inflation forecast update in June by about 0.2 percentage points,” Antonio Garcia Pascual, chief euro-area economist at Barclays Plc in London, wrote in a research note. While the ECB will probably stay on hold at this week’s meeting, the likelihood of more easing “remains very elevated,” Barclays economists said.


-- The same day across the English Channel, the Bank of England’s Monetary Policy Committee is forecast to leave its key interest rate at an all-time low of 0.5 percent and maintain the stock of purchased assets at 375 billion pounds ($633 billion). While the U.K. economy is stronger than the euro area’s, inflation is subdued and a challenging European export market leaves the outlook for growth centered more on the service sector than on manufacturing, Barclays economists said.

-- “The economic recovery in the U.K. also faces bigger constraints, including higher debt levels and a bigger fiscal squeeze,” Jack Allen at Capital Economics wrote in an April 30 note. “We think the MPC will keep monetary policy on hold for slightly longer than the Fed. While we are forecasting the Fed to begin raising interest rates midway through next year, we think the MPC will wait until Q4 before following suit.”


-- China probably recorded a trade surplus of $18.8 billion in April as exports and imports declined from a year earlier, economists said in a Bloomberg survey ahead of a May 8 report.

-- “Export growth data will again be plagued by inflated trade numbers last year, making it difficult to predict,” economists led by Ting Lu at Bank of America Corp. wrote in a note April 29. “We actually see signs of improvement in external demand and we expect export growth to the U.S. to strengthen as weather-related weakness dissipates.”


-- The Institute for Supply Management’s non-manufacturing index is projected to climb to 54 in April from 53.1 a month earlier, the Bloomberg survey median shows ahead of a report tomorrow. The gain would follow an increase in the group’s manufacturing gauge that showed factories expanded in April at the fastest pace this year.

-- “In March, respondents noted activity was still being hampered by adverse weather, which, along with a strengthening in new orders, should support a slight pickup in April,” economists from Wells Fargo & Co. in Charlotte, North Carolina, wrote in a report. “We expect the ISM non-manufacturing index to indicate that the service sector continued to expand at a modest pace in April.”


-- Australian employers probably hired 9,500 people in April, an insufficient number to prevent the unemployment rate from climbing to 5.9 percent from 5.8 percent, economists forecast before May 8 data. The Reserve Bank of Australia is projected to keep its benchmark interest rate at a record-low 2.5 percent at its meeting two days earlier.

-- “Employment growth has been surprising on the upside in recent months and there are some tentative indicators that the unemployment rate may be peaking,” Diana Mousina, an economist at Commonwealth Bank of Australia, said in a May 2 research report. “Unemployment trends are important because the RBA typically doesn’t shift course until the unemployment rate has peaked and starts moving down.”


-- Brazil’s statistics institute on May 9 probably will report that annual inflation in April accelerated to 6.41 percent, the highest rate since June last year and its 44th straight month above the midpoint of the central bank’s 2.5 percent to 6.5 percent target range.

-- “In spite of having lower pressure from food prices, inflation is still very high,” said Roberto Padovani, the chief economist at Votorantim Ctvm, who is forecasting inflation will quicken to 6.5 percent. “The tight labor market is creating pressure on services inflation.”

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