Rate decisions eyed after volatile fortnight

By Sitaraman Shankar

LONDON (Reuters) - Investors kept off balance by a volatile fortnight in the stock markets will look for signs of stability in the week ahead, with all eyes on interest rates and a clutch of companies bringing up the rear of earnings season.

The Bank of Japan and the U.S. Federal Reserve are due to decide on rates on Tuesday and Wednesday, with both announcements awaited for slightly different reasons.

Analysts expect both central banks to hold fire, and say the focus will be on the tone of their statements.

The U.S. announcement will show how concerned the central bank is about fears of a contagion from the troubled subprime mortgage lending business, one of the reasons for the recent nervousness in stock markets.

Japan is being watched because any sign of an increase in rates could raise fears of unwinding of carry trades, or trades that feature borrowing in low-yielding yen to invest in higher-yielding, but often riskier, assets like shares.

The median forecast from a Reuters survey of 80 economists released on Thursday was for a cut in the Feds fund rate to 5.0 percent or lower by the end of September, though the forecasts were taken before the latest bout of stock selling.

"The Fed is on hold but a tightening bias remains," said Brewin Dolphin chief strategist Mike Lenhoff in a note.

"However, if developments in the subprime mortgage markets spill over to the prime market or adversely affect consumer spending and/or curtail lending, thus increasing the risk of a recession, the Fed is in a good position to cut rates aggressively."  Continued...