KBC Flash

ECB downplays chance of early rate cuts

Fri, Mar 7 2008, 09:15 GMT
by KBC Market Research Desk

KBC Bank


  • • ECB suggests it is not planning to change policy anytime soon
  • • Worries about inflation and easing of growth fears mean Trichet sounds less dovish than a month ago
  • • We still expect rates to fall by 75 basis points by end year
  • • Soaring Euro, impact of weak US economy and strains in Spain and Italy will force the ECB’s hand
  • • We now expect first rate cut in June but wouldn’t rule out earlier move if financial conditions deteriorate or activity data disappoint

The European Central Bank kept its key policy rate unchanged at 4.00% for the ninth successive month. Mr. Trichet, the ECB President, used his regular monthly press conference to suggest that the ECB does not intend to alter policy anytime in the near future. In this regard, his main purpose was to deflate market hopes for any near term cut in interest rates.

Mr. Trichet emphasised that the ECB’s focus remains firmly on retaining price stability. Eurozone inflation remained at the record level of 3.2% for a second month in February, some considerable distance above the ECB’s target. So, it will take compelling evidence of a sharp deterioration in Eurozone economic conditions (that would bear down on inflation) before the ECB feels sufficiently comfortable to contemplate reducing rates.

In the wake of Mr. Trichet’s comments today, financial markets take the view that circumstances should change sufficiently to allow the ECB cut rates once in the Summer and probably two more times before end year. We believe that clearer evidence of a sharp weakening of activity and an associated improvement in the inflation outlook should materialise in the next couple of months. As a result, we think the ECB might be forced to cut rates somewhat earlier than the market now envisages. Our expectation that notably poorer economic conditions will develop in the next few months also implies the ECB may have to cut rates as many as three times by the end of the year.

Published on  Fri, Mar 7 2008, 09:21 GMT

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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