Speculation over the probability of a European Central Bank rate cut tomorrow has kept markets jumpy over the fortnight.
rumours that the ECB would discuss scaling back interest rates surfaced last week, although reports about the likelihood of more accommodative monetary policy have been circulating since the ECB decided not to change rates in September.
Consensus is that raising rates right now is just not that likely. Here are a couple reasons why:
– Inflation is too high. Eurozone CPI rose from 2.5% in August to 3.0% in July, above the ECB’s target of just below 2%. Jean-Claude Trichet has boasted about the ECB’s ability to keep prices stable since the inception of the euro.
– While heightening of downside risks seems clear, positive unemployment data from Germany means Europe’s “strongman” might not look kindly at accommodative measures.
– French Jean-Claude Trichet has been hawkish on interest rates, even ushering in controversial hikes earlier this year. That said, incoming ECB President Italian Mario Draghi could prove more dovish in general, given that his homeland has experienced sluggish growth of late. But, he won’t take office until November.
As the euro crisis escalates, it’s becoming clear for most of Europe that downside risks are indeed escalating.
Morgan Stanley noted this morning that Trichet is likely to highlight this tomorrow, and could even hint at a cut for November. A Luxembourg fund company even went so far as to suggest that the ECB immediately cut rates to 0 in a full page ad it took out in the Financial Times.
However, the ECB has made a point of emphasising its commitment to price stability recently, so even this could be far-fetched if we continue to see data suggesting that prices are on the rise.
The ECB will publish that monetary policy decision tomorrow at 7:45 AM EST. The bank will hold a press conference 45 minutes later.