Daily Archives: April 27, 2011

Rates are held, as expected, and QE2 is expected to continue till June. But all eyes will be on Bernanke for any signals of change at the new press conference (see video). For live blog commentary, see Gavyn Davies‘ real time post or his earlier thoughts.

Interest rates are likely to linger for longer at their current record low of 0.5 per cent, following today’s growth figures. With GDP numbers coming in at expectation, market expectations haven’t shifted that much since yesterday, but over the past two months, the change is dramatic (see chart).

Just two months ago, markets forecast three rate rises this year; now the base rate is not expected to reach 0.75 per cent until November. The data also belie an assumption that a rate rise is far likelier in a month following a GDP announcement (notice the jump in expectations for August, November and February). 

With Mario Draghi, Italy’s central bank chief, looking almost certain to become its next president, the European Central Bank is set for a significant change of style – but not necessarily in strategic direction.

Under Jean-Claude Trichet, whose eight-year mandate expires on October 31, the ECB secured an inflation-fighting reputation in the tradition of Germany’s Bundesbank. During the eurozone debt crisis, the central bank acted as a crucial backstop, pumping liquidity on a huge scale into the banking systems of Greece, Ireland, Portugal and Spain. More recently, it has taken a much tougher line in insisting politicians take action themselves. 

Chris Giles

For those wanting a primer on how to interpret the 0.5 per cent rise in UK GDP in the first quarter this morning, you could read this piece from the FT yesterday. But I will also summarise the maths and its implications here.

The 0.5 per cent figure suggests the economy stagnated at best in the six months between the third quarter of 2010 and first quarter of 2011 and probably contracted a little. The stagnation bit is easy to see, since the level of GDP in Q3 2010, with an index number of 99.6, is the same as that in Q1 2011.

The “at best” bit comes from the fact that some of the activity that would have taken place at the end of last year, but was disrupted by the snow – distributing goods or maintenance of equipment for example – will have taken place in the first quarter, flattering the latest figures. We don’t know how big this effect was, but can put boundaries on it. At best, the economy stagnated. At worst, if all of the 0.5 per cent of activity lost in the fourth quarter was displaced into the first quarter, the underlying level of activity is now 0.5 per cent lower than that in Q3 2010.