How will the European Central Bank react to longer lockdowns?

How will the European Central Bank react to longer lockdowns?

Extended Covid-19 lockdowns, the pace of vaccinations and the prospects for an economic recovery will be in focus when the European Central Bank holds its first rate-setting meeting of the year on Thursday.

Christine Lagarde, ECB president, gave a flavour of what to expect from the discussion when she said last week that there was likely to be a rebound in economic activity this year, driven by “expected pent-up demand” being released as the pandemic is brought under control. 

But that would not be enough to justify a tightening of the ECB’s monetary policy, she warned. “Any kind of tightening at the moment would be very unwarranted,” she told a Reuters event. 

Her comments came as German chancellor Angela Merkel warned that her country’s lockdown might last another eight to 10 weeks, while the Netherlands extended its lockdown by three weeks.

While the central bank is widely expected to keep its main monetary policies unchanged on Thursday, Ms Lagarde has already signalled that it could expand its main bond-buying programme further if there is a delay in vaccinations and lockdowns remain in place for longer than expected.

The central bank last month expanded its emergency bond-buying programme to €1.85tn and extended it until March 2022.

Meanwhile, the ECB is keeping a close eye on the recent rise in the euro against the US dollar, which it expects to put downward pressure on inflation by lowering the price of imports. Ms Lagarde said it would “continue to be extremely attentive to the impact on prices that exchange rates have”. Martin Arnold

Will inflation data push Bank of England into negative rates?

The UK economy risks entering a double-dip recession, and inflation remains well below the Bank of England’s 2 per cent target, testing the view held by some investors that negative rates are not on the agenda.

Investors are betting that the bank of England won’t respond to the economic gloom by pushing interest rates below zero, money market pricing indicates. For much of 2020 markets were pricing a cut into negative territory over the coming two years, until the arrival of coronavirus vaccines fuelled expectations of a sharp rebound in economic activity.

But the picture is now murkier, after data from the Office for National Statistics on Friday showed a contraction in November, the first in six months. Inflation numbers for December, published on Wednesday, will be crucial in shaping investors’ expectations about the central bank’s next move.

“The probability of a cut is rising,” said Robert Wood, UK economist at Bank of America. “Inflation and likely persistent spare capacity suggests a need for more stimulus.”

Analysts at RBC say the central bank could push rates from 0.1 per cent to minus 0.15 per cent at its next meeting in February.

Policymakers are also sending signals that a rate cut is still an option for the bank. Silvana Tenreyro, an external member of the BoE’s monetary policy committee, said last week that there was a possibility that the economy would need further support, in which case “having negative rates in our toolbox will . . . be important”. Eva Szalay

Can Hong Kong’s stock market finally recover from the pandemic?

Hong Kong stocks lagged behind their peers badly in 2020, failing to fully recover from sharp falls early in the year as Covid-19 swept first through China before the rest of the world. The Hang Seng index lost 3.4 per cent compared with local-currency gains of 27 per cent for the mainland China benchmark and 16 per cent for US stocks.

Shares listed in the city lost ground after Beijing imposed a sweeping national security law in June, and experienced regulatory pressure from both Beijing and Washington on big Hong Kong-listed tech groups such as Alibaba and Tencent.

But 2021 is shaping up to be a better year for the Hang Seng, as Chinese investors continue to pour money into Hong Kong-listed stocks through market link-ups with Shanghai and Shenzhen. Together with adjustments to the stock index to reflect Chinese tech groups’ growing dominance, this could finally push the benchmark, which is up 4.9 per cent since the start of January, back above the 29,000 level for the first time in a year.

And Chinese appetite for so-called “H shares” shows no sign of fading. A fourth-quarter survey by the Cheung Kong Graduate School of Business showed Chinese investor sentiment towards Hong Kong improving markedly, with more than 46 per cent of respondents saying they were more confident that shares would rise. Hudson Lockett