Draghi Bonds, UK And Sweden Rate Decisions

Thursday will be a busy day in Europe, with a wave of central bank interest rate decisions to watch out for. Sweden’s Riksbank will kick-off the European session with a rate announcement at 7:30 GMT, followed by the Bank of England at 11:00 GMT. At 11:45 GMT we will hear from the European Central Bank, which is on the cusp of unveiling a new bond buying programme. Investors will be waiting eagerly to hear what Mario Draghi, its president, will say at the press conference in Frankfurt.

ECB rate decision (11:45 GMT) The European Central Bank is expected to keep rates on hold at 0.75% when the Governing Council meets today, but it's the press conference 45 minutes later that will be on everyone's mind. Reports in the media on Wednesday suggested that the rumoured bond buying plan will be discussed at the press conference. The programme, which has been referred to by Bloomberg as the Monetary Outright Transactions, is likely to see the ECB purchase unlimited amounts of government debt from peripheral countries with a maturity of 3 years and below. However, the plan could run into complications as it is expected that only short-term paper from governments that meet the terms of their austerity targets will be granted access.

This means both Italy and Spain may warrant a full bailout before the ECB can purchase their debt on a large scale. Before events in Frankfurt get underway there are also a few economic data releases to look out for. The second estimate for Q2 GDP in the Eurozone is expected to show the region contracting by 0.2%. Meanwhile, German factory orders are also forecast to fall by 4.5% for the month of July, although the decline is softer than previous the month’s contraction of 7.8%.

Bank of England rate decision (11:00 GMT) The Bank of England is likely to leave interest rates on hold and continue its programme to purchase £50 billion more of assets, which it announced in July this year. Recent data on the UK economy has been generally mixed. The manufacturing PMI for August improved from 45.2 to 49.5, but construction output continues to contract, according to a recent PMI survey, falling to 49 from 50.9 over the month. I expect the BOE will wait until next year to consider its next policy move, as it assesses the effects of the £80 billion funding for lending scheme.

This means the next big announcement will likely be the name of the person whom the UK chancellor, George Osborne, selects to replace Mervyn King as governor when his term ends next June. Deputy governor Paul Tucker and FSA chairman Lord Turner are among the favourites, although an article in the Economist last week suggested that Mark Carney, currently governor at the Bank of Canada, as having a 6-1 shot at the job.

Riksbank rate decision (07:30 GMT) Sweden’s central bank is expected to leave rates unchanged at 1.5%, according to a consensus of analysts. That said, the Riksbank may surprise markets with a rate cut. According to one press report, a survey by Swedish bank SEB reportedly found that 63% of respondents thought the Riksbank would announce a 25bps rate cut. Although Sweden has recorded steady growth in recent months, with GDP estimated at 1.4% in the second quarter, inflation ran at 0.7% in July, well below the central bank's target.

Deputy governors Karolina Ekholm and Lars Svensson have both advocated lowering the repo rate to 1% in the past, and are expected to do so at this meeting. The question is whether the other four members of the Executive Board will change their vote.