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Mid-Day Market Report 18 Feb 2014: U.K. inflation slows below Bank of England goal for first time since 2009

The Bank of Japan keeps monetary policy steady, extends special loan schemes

The Bank of Japan kept monetary policy steady today and maintained its upbeat assessment on the economy, unfazed by recent signs of slackening momentum in growth and signaling that any additional stimulus may be some time away. The central bank also decided to extend three special loan facilities by one year from their scheduled expiry at end March. The facilities had been cobbled together between 2010 and 2012 as a way to drive funds through the banking sector to borrowers. As widely expected, the BOJ voted unanimously to maintain its pledge of increasing base money, its key policy gauge, at an annual pace of 60 trillion to 70 trillion yen ($589-$687 billion). The BOJ has stood pat since launching an intense burst of stimulus last April, when it pledged to accelerate inflation to 2 percent in roughly two years via aggressive asset purchases in a country mired in deflation for 15 years.

 

U.K. inflation slows below Bank of England goal for first time since 2009

U.K. inflation unexpectedly cooled in December, slowing to below the Bank of England’s 2 percent target for the first time since November 2009. The Office for National Statistics said today that consumer prices rose an annual 1.9 percent, down from 2 percent in December. The median estimate was for it to remain unchanged. The largest downward contribution came from DVDs, museum entry fees, household goods and alcohol.  The BOE forecasts that inflation will remain close to its goal over the next three years and that price expectations remain well anchored. Coupled with the level of spare capacity in the economy, Governor Mark Carney says there is scope for policy makers to keep interest rates at a record-low 0.5 percent for some time to help the economic recovery.  Today’s report showed that consumer prices fell 0.6 percent in January from December, the biggest monthly decline since January 2009. The core annual inflation rate slipped to 1.6 percent from 1.7 percent, the lowest since June 2009.  “The inflation environment is more benign than we had anticipated,” Carney said on Feb. 12 as the BOE published new forecasts. “Global inflation is subdued, with core inflation in both the euro area and U.S. close to 1 percent; commodity prices have fallen, and sterling has appreciated by 10 percent since its March trough. All of these developments will hold back imported inflation pressures.”  After the news, pound, which hit a five-year high against a basket of currencies on Monday on expectations rates would soon be on an upward path, fell to a session low of $1.6659 from $1.6686 before the data. The euro rose to 82.37 pence from 82.21 pence.

German investor confidence falls more than expected in February

German investor sentiment fell for a second month in February, signaling concern that the fragile recoveries in neighboring countries pose a risk to Europe’s largest economy.  The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, slid to 55.7 from 61.7 in January, after reaching a seven-year high of 62 in December. Economists forecast a decline to 61.5.  While German economic growth of 0.4 percent in the fourth quarter exceeded analysts’ estimates, investors are still cautious about the rest of the euro area, the nation’s biggest trading partner. Regional unemployment near a record high, shrinking bank lending and persistently low inflation have prompted the ECB to say it may ease policy as soon as next month to support a subdued recovery. German fourth-quarter growth was driven primarily by net trade, with exports rising “much more strongly” than imports, the country’s statistics office said on Feb. 14. Private consumption declined “slightly,” while investment in equipment and construction increased.

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