* Draghi, Carney to hog spotlight
* ECB, BOE firmly on hold but unease stir over euro strength
* Trade data eyed for signs of reviving global demand
By Alan Wheatley, Global Economics Correspondent
LONDON, Feb 3 Central banking is in a state of
flux as policymakers from Tokyo to Washington ditch prevailing
orthodoxies to try to grab a bigger share of a slow-growing
global economic pie.
That's why the focus this week will be on what European
Central Bank (ECB)Governor Mario Draghi has to say about the
strength of the euro and what Canadian central bank chief Mark
Carney might have in mind when he succeeds Mervyn King at the
Bank of England (BOE) in July.
Draghi holds a news conference on Thursday after an ECB
policy-setting meeting. On the same day, with delicious timing,
Carney will be wrapping up testimony to British lawmakers just
as the BoE announces the results of its own policy meeting.
The unanimous verdict of economists polled by Reuters is
that neither bank will change its stance. The environment,
however, is shifting, presenting both with unwanted challenges.
The ECB must keep a close eye on the euro, which has risen
to a 14-month peak against the dollar and a 30-month high
against the yen, reflecting the Federal Reserve's promise to
keep buying bonds until U.S. unemployment falls much farther and
the Bank of Japan's plan for a much looser monetary policy.
Exchange rates have much less of an impact on trade volumes
than the state of external demand.
But, with global growth languishing, the relative
performance of euro zone exporters will take a hit, said Daniel
McCormack, a strategist at Macquarie in London.
"The euro could well be starting to cause a bit of pain
already. It's moved up significantly, and in the context of what
Japan's doing and the Fed's desire to get the dollar down or
keep it low, it will have some impact," he said.
WHAT MIGHT THE ECB DO?
France has already complained about the euro's climb and
Germany has blamed Japan for encouraging a weaker yen.
But Goldman Sachs said an ECB rate cut in response to a
rising euro was still some way off, not least because the
currency's vigour was largely due to improving economic and
financial news from the euro zone.
The bank's economists did acknowledge, however, that the
risks to its forecast that rates will stay on hold in 2013 were
skewed to the downside.
"While global growth is picking up and demand growing,
concerns about appreciation may be muted. But a strengthening
euro in a stagnant global economy is likely to prompt questions
about where the 'pain threshold' of German exporters to the
level of the euro exchange rate lies," they said in a report.
Like the dollar, sterling has also fallen to a 14-month low
against the euro.
British policymakers view a weaker pound as part of the
solution to reviving the economy, which stagnated in 2012, and
Goldman is among those who expect continued depreciation given
the prospect of a more innovative and expansionary monetary
policy under Carney.
McCormack reckons the shortfall in Britain's potential
output that has opened up due to the recession is so great that
the BOE might not need to contemplate tightening until 2018 - a
full decade after the financial crisis climaxed.
But he said it was debatable whether Carney would prevail
with his suggestion of targeting nominal gross domestic product,
which implies permitting a temporary overshoot of inflation to
allow growth to catch up.
"Most central bankers at the end of the day are in favour of
strict inflation targeting. So he'll face a lot of intellectual
pushback if he tries to get that through. But clearly there's
the potential for some significant policy innovations once he's
on board because he'll want to make his mark," McCormack said.
TRADE POLICY AND DATA IN SPOTLIGHT
Central banks are not alone in rummaging around for new ways
to spur growth.
European Union leaders, who hold a summit on Thursday
devoted mainly to the bloc's budget, are expected to call for
maximum efforts to reach a series of bilateral free trade pacts
to lower tariffs and cut red tape throttling exports.
The prospects for talks with the United States and Canada
are still up in the air, but leaders are likely to endorse an
early start to talks with Japan, according to diplomats.
Trade figures happen to be the core of this week's global
Britain's gaping goods deficit is forecast to show a small
improvement, due in part to sterling's weakness.
China's imports are projected to leap, which would bode well
for world growth.
But, like most early-year data from Asia, interpretation
will be treacherous because of calendar distortions: Lunar New
Year, when factories in China close en masse, falls this year on
Feb. 10, while last year the week-long holiday was in January.
America is likely to show a narrower trade deficit in
December. Improving net exports would reinforce the view that
the unexpected dip in GDP last quarter was due to fleeting
factors and not the harbinger of a trend.
Bruce Kasman, an economist with JP Morgan in New York, said
after Friday's good-but-not-great January jobs report that the
economy was on track to expand about 2 percent this year despite
fiscal drag that would lop at least 1.5 percent off growth.
Kasman said he was heartened by solid gains in labour income
in recent months. Risks of a break-up of the euro, a hard
landing in China and a plunge off the fiscal cliff in the United
States had also been avoided.
All this pointed to steady if unspectacular U.S. growth.
"We don't have by any means the kind of growth that we would
like, but we are setting ourselves up for a world where there's
less risk and more sustainability," Kasman said on a conference