London letter, week beginning March 14
- Osborne’s budget cut and rate decision of BOE
There is no doubt that the rally for the European Central Bank’s (EBC) decision to expand quantitative easing has been boosting equity markets. As expected with the initial announcement of the ECB’s decisions last week, Turkish bonds continued to attract investors in the first day of the week.
“The sun is shining over equity markets all over the globe. Money is pumping into stocks on expectations that (ECB President) Mario Draghi’s brilliant incentive to inundate the market with extra cash will certainly not leave the other central bankers stock-still,” according to market analyst Ipek Ozkardeskaya from London Capital Group.
- How EBC decision will affect Turkey
In the near term, in the markets Turkey is seen as possibly benefiting from the EBC decision as this could also give the Central Bank of the Republic of Turkey (CBRT) a chance to maintain its loose monetary conditions for some time according to analysts in London.
- FM Osborne’s anticipated public spending cuts announcement
This week, Finance Minister George Osborne will make the headlines in the U.K., as he is expected to introduce measures from the current budget plan of the country, on March 15. According to recent stories circulating in the media, Osborne is expected to announce further cuts to public spending this week to protect his austerity plan from a weakening of the economy.
Osborne could "make a weak economic situation weaker" if he goes ahead with more spending cuts, a non-governmental forecasting group, the EY Item Club, warned. U.K. growth could be downgraded to 2 percent in Wednesday's budget amid a slowing world economy, the forecasters predicted.
While the EU referendum still remains the biggest uncertainty ahead of the U.K., current polls show that voters are divided almost 50-50 over whether to stay in the EU. Osborne’s hand could well be quite tied to “cutting spending drastically.”
- BOE interest rates
On the other hand, the Bank of England looks set to keep interest rates on hold as fears over global growth and the threat of Britain leaving the European Union continue to loom large over the U.K. economy. Members of the Monetary Policy Committee are expected to vote unanimously in favor of leaving interest rates at the current level of 0.5 percent, where they have remained since March 2009. Some analysts are now even predicting rates to stay at 0.5 percent until 2017.