Is Europe About To Get Double-Stimulus?

Spain strikes protests

Some quick thoughts on Europe.

This morning the Eurozone got two notable datapoints.

Unemployment hit a new all-time high.

And inflation fell to 1.2%.

With unemployment this high and inflation this low, the obvious thing is for the ECB to cut rates. And though the ECB probably should have cut rates a while ago, a rate cut this Thursday now seems like a done deal.

It’s possible the ECB will even do more than a 25 basis point cut.

Says economist Frederik Ducrozet of Credit Agricole:

Weak activity and inflation data have strengthened the case for a policy surprise by the ECB on Thursday, relative to our forecast of a 25bp Refi rate cut.

A one-off 50bp rate cut would arguably have a much larger market impact. The proximity of the zero bound and the ECB’s reluctance to deliver large cuts suggest that the likelihood remains relatively low. A negative deposit rate, meanwhile, looks very unlikely. On balance, we still believe that the Governing Council will cut by ‘only’ 25bp, probably in a unanimous decision, leaving all options open for the future.

Meanwhile, talk grows in Europe of slowing down on austerity and deficit reduction targets, which is a modest form of stimulus.

So Europe could be looking at both monetary easing and help on the fiscal side.

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