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Economic week ahead: Central banks to set the tone

Matt Quigley

While South Africa's economic calendar may be quiet, policymakers at four major central banks are due to announce decisions this week.

Bank of England governor Mervyn King. (AFP)

Policymakers at four major central banks – the US Federal Reserve, European Central Bank, Bank of England and Bank of Japan – will all announce decisions this week. Here is your guide to the meetings, data releases and other events likely to move markets in the week ahead.

United States
March's jobs report is the big item on America's economic calendar this week. Economists expect Friday's data to show that the world's largest economy added 197 000 non-farm jobs in March, down from 236 000 in February. The country's employment rate is expected to remain unchanged at 7.7%, its lowest level in four years, according to Thomson Reuters' consensus estimate.

The Federal Reserve has said that it will not consider raising interest rates until America's unemployment rate falls to 6.5%, a level it does not expect until 2015. The latest forecast from the central bank, released last week, foresees the jobless rate falling to between 7.3% and 7.5% at the end of this year.

A stronger than expected jobs report could lead to a pullback in equity markets if investors fear that it foreshadows a slowdown in the Fed's quantitative easing programme, a monthly bond purchase initiative credited with raising equity prices.

In the run-to Friday's jobs data, investors will watch for the Institute for Supply Management's manufacturing index on Monday, factory orders data on Tuesday, ADP's employment report on Wednesday and weekly jobless figures on Friday.

Markets expect the ISM's index to have declined slightly to 54.0 in March from 54.2 in February. Factory orders are forecast to have risen 2.9% from January to February. ADP's report is likely to show that private payrolls expanded by 205 000 in March. New claims for jobless benefits likely fell to 350 000 last week from 357 000 in the week prior.

Europe
The European Central Bank (ECB) and the Bank of England (BOE) will announce their latest monetary policy decisions on Thursday. Both banks are expected to leave rates unchanged at 0.75% and 0.50%, respectively.

The ECB's benchmark refinancing rate has been on hold since July of last year. With the 17-member eurozone mired in recession and facing a grim economic outlook, many economists believe the ECB should cut rates further or expand the use of unconventional monetary policy tools in a bid to bolster growth, but few expect policymakers to do so.

The Bank of England's base rate has been on hold at its lowest level since 1694 for the past four years. Although no further rate cut is expected this week, some economists believe officials may boost the size of the bank's ?375-billion asset purchase programme.

Retiring governor Mervyn King and two of his nine colleagues on the BOE's monetary policy committee pushed unsuccessfully for a ?25-billion increase at the bank's February meeting. Most analysts believe that if policymakers do not act at this week's meeting, they are unlikely to so until Mark Carney takes over from King in July.

Beyond Thursday's central bank announcements, markets will be on the look-out for a series of purchasing managers' index (PMI) readings this week. Reports covering Germany, France and the eurozone as a whole will be released on Tuesday. All three are expected to remain stuck in contraction territory.

Finally, in the background this week, markets will be watching events in Italy. One month after elections, politicians have made no progress in forming a government.

Asia
The Bank of Japan's monetary policy committee will meet on Wednesday and Thursday. This week's gathering will be the first chaired by newly appointed Governor Haruhiko Kuroda. 

Japan – the world's third largest economy – has been battling deflation, or falling prices, for over 15-years. Kuroda has pledged to do "whatever it takes" to raise the country's inflation rate to 2.0% within two-years. Although many economists doubt that this goal is achievable within such a short period of time, they do expect the BOJ to act aggressively under his leadership. With the BOJ's overnight rate already at 0.1%, attention is focussed on the central bank's asset purchase programmes.

In a bid to flood the market with liquidity – thereby promoting lending and, hopefully, stimulating the economy – the BOJ currently purchases government bonds through regular market operations and through an asset purchase programme established in 2010. Analysts believe that Kuroda may seek to combine these two funds to make the size and timing of purchases more transparent to the market.

Reports also suggest that the bank may begin buying government debt with longer maturities. The BOJ's current purchases have been limited to bonds that mature in three-year or less. Kuroda said recently that the bank should consider buying five- or 10-year bonds to further lower long-term interest rates, stimulate corporate spending and promote housing purchases.

Finally, Kuroda is expected to urge his new colleagues to bring forward the start of open-ended easing programmes – planned to begin in 2014 – and begin purchasing riskier assets.

Africa
On Tuesday, the Bank of Uganda's monetary and credit policy committee will announce its latest interest rates decision. In the face of persistent inflationary pressures, analysts expect policymakers to leave the Bank's benchmark interest rate on hold at 12.0% for a fifth consecutive month.

Uganda's consumer price inflation rose in March, reversing a downward trend observed since January. CPI rose by 4.0% from a year earlier. Core inflation – a measure which excludes food crops, fuel, electricity and metered water – accelerated to 6.8%, year on year, remaining above the central bank's medium-term target of 5.0% for the second consecutive month.

The tight monetary policy stance employed by the BOU has been successful in easing inflation, which peaked at 30.4% in October 2011, but has constrained economic growth in the East African country. Despite an 11-percentage point drop in the country's benchmark rate, commercial banks' prime lending rates remain above 20.0% on average. With real interest rates still at very high levels, credit growth has remained low.

Elsewhere on the continent this week, Ghana will release February's gross reserves data, Namibia will report February's M2 money supply figures and South Africa will report PMI and vehicle sales data.  

The Bureau for Economic Research at the University of Stellenbosch in South Africa will release PMI readings on Tuesday. Vehicle sales data from the National Association of Automobile Manufacturers of South Africa will follow on Wednesday.

Matt Quigley writes a weekly economic preview for the Mail & Guardian Online. You can follow him on Twitter at @mattquigley.


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