Draghi, Carney likely to recommit lower rates

The euro and sterling dropped against the dollar, while bonds and stocks gained as both European central bankers’ Draghi and Carney might again use rhetoric to remote themselves from the Federal Reserve Chairman Ben S. Bernanke’s signal that the U.S. is preparing to start scaling back monetary stimulus later this year.

After a two day FOMC meeting, the Fed has decided on Thursday to keep quantitative easing flowing at its monthly doze of $85 billion – keeping interest rates at record lows. The market barely moved, but the dollar was the cherry on top.

Moving to Europe, the ECB turned even more dovish with the adoption of “forward guidance” on interest rates – a pre-commitment to keep borrowing costs at `present or lower levels` to ease access of credit to households and businesses.

Market tensions were somehow offset by the recently introduced strategy, but the euro couldn`t bear Mario Draghi`s dovish mood as usual. As of 10:06 GMT, EUR/USD slipped to 1.3249, while GBP/USD extended the bearish wave to 1.5147.

The ECB President is still scrambling to pull the euro-area economy out of its record-long recession and emphasizing again the same old downside risks to economic outlook would certainly prompt him to maintain a fully accommodative monetary policy as long as necessary.

As far as we believe the impact of the ECB`s ultra-loose monetary policy hasn`t clearly emerged on the real economic front yet, but banks in troubled countries have been blessed by the central bank`s lower borrowing costs, specifically since the ECB cut the benchmark interest rate in May.

Accordingly, the ECB will most likely hold its dovish stance at the upcoming meeting, and Draghi would reiterate his pledge of keeping rates at its current low for an extended period and a future cut, however, won’t be ruled out if the economy trails the hoped-for recovery later this year."

Will Carney pursue more formal guidance?

The Carney `fever` has infected everyone at BoE in July, as the Canadian centra banker persuaded MPC members Fisher and Miles to back down their dovish goals. The latest policy decision was surprising – size of the QE program was, for the first in two years, unanimously kept unchanged at 375 billion pounds.

Simultaneously, Carney set on his fireworks earlier than expected – using his first meeting as governor to offer `future guidance` on interest rates, besides to the unexpected statement after the MPC July meeting, which helped ease fears in the markets and bring bond yields back down.

The BoE is likely to hold grounds in terms of key rates and APF size, although June inflation data offered a new scope for MPC members to act and extend bond purchases.

The UK economic recovery is so far taking hold, but Carney is apparently not satisfied, so he might be into pushing on further accommodation, and perhaps an introduction of more formal forward guidance could further relief UK households and businesses.

Carney will deliver his first inflation projections in the Bank’s August report, but the most important question is whether the new governor is going to take things beyond July’s surprising shift.

Until now Carney has already done the unexpected at his first policy meeting, but further emphasis on forward guidance is necessary considering the bad shape of the UK economy recovery.

The MPC apparently has no better options than policy accommodation, as Carney seeks to introduce new policy tools in a bid to make his tactics count more than those of the Federal Reserve’s and Japanese counterpart, thus further action remains an option for the near term.