Weekly Economic Data Preview

Bank of England and ECB Set to Lower Interest Rates Sharply

The Bank of England and ECB are poised to reduce interest rates this week, with the respective central banks of Australia and New Zealand also expected to ease policy. In the UK, we expect interest rates to come down by 100bps to 2%, though consensus forecasts range from 1.5% to 2.5%. UK mortgage approvals will confirm weakness in the housing sector, while the PMI surveys will be closely examined to assess the extent to which economic activity and pricing pressures have fallen further. The ECB is expected to cut rates by 50bps to 2.75%, though recent poor business sentiment surveys and the sharp fall in EU-15 CPI to 2.1% in November increase the risk of a larger reduction. The RBA and RBNZ are forecast to cut rates by 75bps and 150bps to 4.5% and 5%, respectively. On Friday, all eyes will be on the US employment report, with non-farm payrolls forecast to fall by 275,000 (consensus: 323,000) and the jobless rate expected to rise to a 15-year high of 6.7%. This should cement further Fed policy easing when the FOMC next meets on December 15/16, perhaps by 0.5%.

We expect the Bank of England MPC to cut interest rates by a further 100bps this week to leave official rates at 2%, matching the all-time low. The economy is expected to have contracted again in the current quarter and is forecast to continue shrinking in every quarter until the second half of next year. Mortgage approvals are predicted to have remained near recent lows of around 30k in October, while growth in mortgage lending and consumer credit will remain weak. The manufacturing and services PMI surveys provide a timely indication of growth and pricing pressures in November and should pave the way for the MPC to cut interest rates aggressively. More generally, a significantly weaker growth outlook, resulting from the risk of widespread insolvency in the global financial system, and sharply lower commodity prices (none of which was generally anticipated and certainly not by any MPC member) mean that CPI inflation is expected to fall below the 2% target next year, providing leeway for further interest rate reductions in early 2009. As chart 1 shows, UK interest rates last month fell below eurozone rates for the first time since the euro's inception and are expected to remain lower throughout 2009.

The ECB will lower interest rates from the current 3.25% level this week, but the question is by how much. A reduction to at least 2.75% is likely, though the recent rapid deterioration in business sentiment and the surprisingly large fall in eurozone CPI inflation in November have raised the risk of a larger reduction, perhaps to 2.5% or even 2.25%. Eurostat is expected to confirm that eurozone growth in Q3 fell by 0.2%, the second consecutive quarterly decline, while latest survey evidence, including this week's manufacturing and services PMI, points to further contraction in the current quarter. As usual, markets will focus on ECB President Trichet's comments following the interest rate announcement, including a new set of growth and inflation forecasts, which are expected to be revised down significantly from the previous projections in September.

The US Federal Reserve next meets on December 15/16, with incoming data pointing to further reductions in interest rates from the current 1% level, in our view of half a percent to 0.5%. The release of ADP employment figures and ISM surveys may provide clues to the outturn of the official employment report on Friday. We forecast a fall of 275,000 in November non-farm payrolls, which would be the eleventh consecutive decline, with the recent pace of net job losses accelerating from around 75,000 a month in the first half of 2008. The market consensus forecast is for a slightly larger fall of 323,000. The unemployment rate is expected to rise to 6.7% from 6.5%, the highest for 15 years. Weak factory orders data, due for October, will confirm a weak start to the fourth quarter.

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