The ECB has its monthly meeting tomorrow, and there’s a pretty big consensus growing that it’s going to do some kind of rate cut.
Inflation has fallen to 1.2%, and unemployment is up to 12.1%. This situation demands a policy response. Even the famously tight ECB is likely to see the merits of easing in this situation.
In a note put out yesterday, Lorcan Roche Kelly of Trend Macrolytics has a slightly contrarian take on what the ECB should do tomorrow. First of all, he does think there will be a rate cut, whereas previously he was sceptical.
BUT, he argues that a rate cut isn’t the right tool for the job, and won’t accomplish anything because of how broken everything is. Instead, the ECB needs to open up new channels to extend credit to Small and Medium Sized Enterprises, especially in the periphery where traditional monetary policy channels are impaired.
For a broad example of what the ECB could do that would actually be effective, he writes:
It may be that these moves are enough to prompt action from the ECB — such as increasing collateral eligibility of SME credits, or so-called “structural operations” through the national central banks. If they were, then that would certainly be much more positive for the euro area than a rate cut.
As usual with the ECB, this Thursday the rate announcement is made 45 minutes before the press conference starts. An announcement of a rate cut is a likely signal that the ECB is going to do nothing more. Conversely, no rate cut announcement should not necessarily be viewed as a time to sell. The data — especially the inflation data — demands a reaction from the ECB. If it — correctly — chooses not to use the interest rate tool, then anything else it chooses will have more of the “big bang” properties that can give the ongoing rally new legs. On the other hand, if the ECB does nothing at all, we will have the seen the top in the peripheral debt rally, at least until the ECB finally responds.
Business Insider Emails & Alerts
Site highlights each day to your inbox.