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Week Ahead: five years of rock bottom rates

Our preview of the main financial events of the coming week.

 

by Chris Marshall on Feb 28, 2014 at 14:41

Week Ahead: five years of rock bottom rates

The Bank of England will this week usher in five years of rock-bottom interest rates, while the European Central Bank’s (ECB) next moves are less predictable as Mario Draghi continues to fire-fight in the slow-growing euro bloc.

To the relief of mortgage borrowers, but irritation of savers, the UK’s rate-setters aren’t likely to start bumping up rates from the low of 0.5% that was set in March 2009 until the second quarter of next year. And even then it will be a gradual process; although inflation has fallen to 1.9% and unemployment to 7.2%, Bank governor Mark Carney has reiterated that he won’t risk derailing the economic recovery and wants to absorb the economy’s spare capacity.

More clues about the strength of that recovery will be available next week with the UK’s February ‘PMI’ reports that monitor private sector business activity, which could reflect the impact of the widespread flooding.

Whatever the exact timing of the first rate rise, mortgage borrowers are being warned not to underestimate the impact on their future monthly payments.

European action

While the debate in the UK is fixed on when policy will get tighter, in the Eurozone economists are asking how the ECB can further support the bloc’s recovery, with interest rates already near-zero.

Next week’s European policy decision is expected to be a close call. A third of 78 economists polled by Reuters expect a cut in the main refinancing rate from the current 0.25% at the ECB's March 6 meeting. The rest though worry that the ECB has few options remaining and will need to take more aggressive action.

Payrolls dictate market sentiment

For global markets, all of this pales in contrast compared with US policy.

Key to the debate about how quickly the Federal Reserve withdraws its QE bond-buying scheme (which has already been snipped back twice, to the current $65 billion a month) is the health of the labour market. An update on Friday has the potential to move global markets. The unemployment rate is expected to remain steady at 6.6%, while the ‘non-farm payrolls’ report is expected to show that 160,000 jobs were added to the economy in February, after two successive months of disappointing outcomes.

Among other major data due in the US next week, the ISM manufacturing index is expected to remain weak for another month as industry pays for the poor winter weather.

The White House releases its budget plan for fiscal 2015 on Tuesday.

Also in the US next week, Warren Buffett will publish his annual letter to investors alongside the annual report from his firm Berkshire Hathaway.

Chinese official growth forecasts

In China, PMIs are also published throughout the coming days.

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