Will the ECB signal a step up in bond buying is on the horizon?

How will the ECB address mounting economic challenges?

When European Central Bank president Christine Lagarde and other top policymakers meet on Thursday, they will be uncomfortably aware of the mounting challenges to the eurozone economy.

Deflation has tightened its grip on the bloc, the second wave of coronavirus infections threatens to drag it into a double-dip recession, talks on the EU’s recovery fund have stalled and time is running out for a post-Brexit trade deal.

Add to this the potential for financial markets to take a hit if the US election leads to a disputed result next month, and it means there are a rocky few months ahead for Europe’s central bankers.

Yet most ECB-watchers expect Ms Lagarde to say the central bank is keeping its main monetary policies on hold for now, while sending a clear signal that it is preparing for more easing at its next meeting in December.

“The ECB could pave the way for more stimulus in December without showing its cards,” said Carsten Brzeski, economist at ING.

Members of the ECB governing council expect it to debate how much one-off factors, such as Germany’s temporary cut in value added tax, are to blame for the two consecutive months of deflation.

The council’s more conservative members will argue that since there is still more than €750bn of firepower left in the ECB’s emergency €1.35tn bond-buying programme the bank does not need to act urgently.

Most economists predict the ECB will expand its bond-buying plans by as much as €500bn in December, when Morgan Stanley analysts also expect it to extend a programme of ultra-cheap loans for banks at rates as low as minus 1 per cent until the end of next year. Martin Arnold

Will the Bank of Japan lower its economic forecasts?

The focus of the two-day policy meeting of the Bank of Japan that begins on Wednesday will not be on action but on its outlook.

Analysts expect that the BoJ’s policy board members will agree that the pandemic will continue to negatively affect the economy, but market consensus firmly holds that they will decide that current policy is appropriate.

Since its last policy meeting in September, the BoJ has only deemed it necessary to step into equity markets with large purchases of ETFs on six occasions.

The real question, say traders, will be the tone of the central bank’s outlook report, due on Thursday, which was last released in July when the principal threat to the economy appeared to be a second wave of Covid-19 infections threatening a second shutdown of schools, restaurants and other measures that proved so damaging in April.

Many now expect the BoJ to lower its forecasts for GDP growth for the financial year that ends in March 2021.

The mood after July, note Capital Economics analysts, was not good: companies revised down their spending plans and the hoped-for recovery in consumption slowed.

The more critical part of the question is whether the BoJ also lowers its forecasts for the following financial year, and the likely effect this might have on the pace of its asset expansion. Leo Lewis

Will US GDP figures affect the presidential race?

On Thursday — just days before the US presidential election — preliminary figures for the nation’s third-quarter gross domestic product will be released by the Bureau of Economic Analysis.

Economists expect GDP will rise 7 per cent on a quarter over quarter basis, according to FT calculations based on a forecast compiled by Bloomberg. That would mark a sharp rebound from the 9 per cent contraction seen between April and June. 

Such a resurgence would provide a positive talking point for Donald Trump at a time when he trails Democratic opponent Joe Biden in national polls. Mr Biden’s wide lead and other polling has led investors to increasingly price in the prospects of a so-called blue wave in which Republicans cede control of both houses of Congress. 

Voters have recently soured on Mr Trump’s handling of the economy, with a Financial Times poll this month finding that 46 per cent of Americans believe Mr Trump’s policies have hurt the recovery.

Economists have also become more worried about the outlook for growth in the coming quarters, given the inability of policymakers to reach a compromise on a stimulus bill.

The delay has provoked much concern among Fed officials as well, who have repeatedly stressed the limits of their own monetary policy tools to shore up the recovery.

“Apart from the course of the virus itself, the most significant downside risk to my outlook would be the failure of additional fiscal support to materialise,” said Fed governor Lael Brainard last week. Colby Smith

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