A Forex View From Afar

Looking for an ECB rate cut?

Written by A Forex View From Afar on Wednesday, May 07, 2008

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According to WSJ, all 50 analysts asked about tomorrow’s ECB Interest Decision said they are expecting no movement. No surprise here, but afterwards, half of the analyst said they are looking for a rate cut from ECB by the end of Q3, and more then a half said the ECB will cut by the end of 2008.

A Dow Jones Newswires survey of 50 financial institutions found respondents unanimous in anticipating unchanged rates Thursday. Just under half, or 22 of those canvassed, expect the ECB to cut rates by the end of the third quarter, while 34 expect a cut by Christmas.

The thing that does not really add up as easily as it could is the economic logic. If everyone expects US growth to pick up during Q3, why would the Euro-Zone growth not pick in Q3? Would it not just be inline with the global expansion that comes from the US markets coming out of contraction? The analysts had the Euro-Zone cutting rates by the start of the summer, when asked back in December. We are very close to summer, and there is not even a rumor about cutting from officials.

The Analyst thoughts seem to be;

-the US slowdown must drag Europe into a recession, which by the way it has not, and when the US economy starts growing again the Analysts have the Euro-Zone shrinking.

-the analysts are saying that the ECB will change its inflation-fighting view for just one quarter. The analyst logic is the European-slowdown (they are foreseeing) will bring down inflation.

-the same things were said about the US slowdown as well; the Analysts said that it will bring down commodity prices and inflation due to lack of demand from the US. They were wrong, Oil just hit a record at $122 a barrel, food commodities are way up, and inflation is still high in the US.

Economists are wagering that the economic slowdown will do what’s needed to bring down inflation, giving the ECB a way to lower the policy rate without compromising its primary mandate of price stability. But they may be expecting too much, too soon.

It would be a strange call from the ECB to modify its stance so quickly, almost overnight, to one of a single mandate of price stability, to one of growth concerns.


Source:
WSJ: Economists Look for ECB Signal on Rates