The ECB Rate Decision

The ECB Rate Decision: Trichet said the ECB has no bias for a cut or a hike, hard as that is to swallow. He also indicated growth this year will be only about 1.4%, from the earlier forecast of 1.8%, and next year, as low as 0.6% to 1.8% (from forecasts only in June of 1-2%). As expected, the debate over whether the ECB could or should cut rates to boost growth remains alive and kicking. The FT says the market still thinks cuts are more likely, with the yield on the Bund (and the UK Gilt) lower on Thursday at both the two-year and 10-year maturities. We say there’s one factor nobody is inserting into the story—that the US Fed rate cuts were inspired in large part by financial market turmoil, and even if the ECB could say inflation is falling and thus a cut is okay, it wouldn’t want to appear to be rescuing banks (even if that was exactly what it was doing with lax collateral rules up to now). Besides, falling currencies imply rising inflation via import prices as well as being equivalent in some small degree to rate cuts.

Bye For Now

Barbara Rockefeller

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