Slowing economies and falling oil will help - ECB to Cut Interest Rates - Yes

Euro Exchange Rate News The ZEW index of professional financial confidence slipped to –63 from –41.1 in September, although it’s a hair better than –63.9 in July. Bloomberg reports that economists had forecast a drop to only –51, so –63 is worse.

Market News reports that the Germany's leading economic research institutes cut their joint GDP forecast today from 1.4% to 0.2% for 2009. The 2008 forecast remains at 1.8%. Germany is on the brink of recession, they say, expecting a contraction of 0.7% in the first half of next year. They still say, all these years later, that private domestic consumption will pick up.

Separately, ECB official Stark told the press that inflation in the eurozone will fall to the ECB target of 2% by the second half of next year. Slowing economies and falling oil will help. Does this mean the ECB can cut again? Yes, although we are not yet to the point of forecasting it for the Nov 6 policy meeting.

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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.

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Barbara Rockefeller

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