June 14, 2015 / 8:05 AM / 2 years ago

All ears tuned to Fed language, Greek debt talks

5 Min Read

A tour bus passes the United States Federal Reserve Board building (rear) in Washington October 28, 2014.Gary Cameron/Files

LONDON (Reuters) - With the U.S. Federal Reserve expected to leave interest rates on hold this week, the market will be focusing on policymakers for clear signals on when the central bank will make its first interest rate hike in nearly a decade.

World shares ended last week on a muted note as Greece's situation took a turn for the worse when the International Monetary Fund's delegation walked out of negotiations in Brussels citing "major differences" with Athens over how to save the country from bankruptcy.

The European Union has also been telling Greek Prime Minister Alexis Tsipras in more strident terms to stop gambling with his cash-strapped country's future and make the big decisions needed to avert a potentially devastating default.

For Fed watchers, the main point of interest will be any change in the nuances of bank Chair Janet Yellen's language after the central bank's announcement.

"We still suspect that Wednesday will be important in terms of communication, given that it is a press conference meeting," said Philip Shaw, chief economist at Investec.

Wall Street's top bond dealers, who just three months ago had a June move pencilled in, now expect the Fed to begin raising rates in September, followed by another hike before the end of the year. [FED/R]

"We don't think the Fed will explicitly reference September, but we do think they will harp on their data dependence and give a nod that a hike this year is likely if the data remain constructive," said Tom Porcelli at RBC Capital Markets.

U.S. industrial output probably increased in May after five months of contraction, data on Monday are expected to show. Figures on Tuesday will likely point to a sustained improvement in the housing market, offering more confidence that the economy has regained momentum after a dismal first quarter.

Minutes from the Bank of England's June policy meeting, due on Wednesday, will according to a Reuters poll show all nine members of the Monetary Policy Committee voted to keep British interest rates at a record low of 0.5 percent this month.

Like with the Fed, economists have been consistently pushing back expectations for when the BoE will make its first move. Late last year, Bank Rate was predicted to have already risen by now. The current consensus suggests it will be early 2016 before it will move up 25 basis points. [BOE/INT]

Tumbling crude oil prices last year sent inflation around the world into free fall, even into negative territory in some countries, giving central banks scant reason to tighten policy - a move that would have hit often fragile growth.

Russia's central bank is therefore expected to cut its main lending rate by 100 basis points on Monday as inflation drops and an economic downturn worsens although a recent plunge in the rouble means the bank may refrain from a sharper cut.

Norway's central bank will cut its main interest rate by 25 basis points to a record low 1.00 percent on Thursday, all 16 economists polled by Reuters said, amid weaker domestic growth as a result of falling oil investments along with the lowest wage increases in decades. [NO/INT]

The Swiss and Indonesian central banks are expected to leave policy unchanged the same day. [SNB/INT]

On Friday the Bank of Japan is likely to sit tight but is expected to adopt further monetary stimulus later this year. Japan has finally escaped from nearly two decades of deflation although is yet to generate significant price rises.

"We expect the BOJ to keep its policy rate on hold and we expect Governor Kuroda to comment on the currency market developments at the press conference," said Axel Lang at Credit Suisse.

The yen hit a 13-year low against the dollar earlier this month. Policymakers in the export-led economy have welcomed its slide, which is largely due to Prime Minister Shinzo Abe's economic strategy of massive monetary stimulus and aggressive fiscal spending.

BOJ chief Haruhiko Kuroda played down the chance of more weakness in the currency last week, but the remarks were not part of a concerted effort by Tokyo to keep the yen's sharp declines in check, government and central bank officials with knowledge of the matter said.

Editing by Hugh Lawson

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