18 Mar 2009

Irish Independent

European Central Bank President Jean-Claude Trichet said policy makers haven’t decided whether to stop cutting interest rates below the current record low of 1.5 percent.

Turning to the ECB, it also has some remaining room for manoeuvre on the interest rate front. We expect a 0.50% cut from the ECB which would take rates in the eurozone down to a new all-time low for the ECB of 1.50%.

However, the ECB, too, is now close to the end of the line as far as using the standard interest rate tool, with a number of prominent officials last week suggesting that 1% would be the “lowest limit” for the ECB.

To convince the ECB that more stimulus is necessary, the incoming news will need to suggest that the economy is even weaker than the poor outlook captured by the latest forecasts.

But, interestingly, some forward-looking economic indicators have begun to creep higher, including the expectations index of the Ifo index of German business confidence. This suggests the ECB might be quite cautious about providing more policy stimulus.

But in the event that the ECB does decide at some point that further monetary policy stimulus is needed over and above that which can be provided by using the remaining room for manoeuvre on interest rates, the question remains - what is the ECB’s preferred method of providing that stimulus?

LONDON - The euro dipped against the dollar on Monday as traders bet that the European Central Bank would cut interest rates later this week in a bid to boost ailing euro zone economies, analysts said.

The dollar also won support as investors looked for havens in the face of mounting worries about the outlook for the global economy.

In morning trade on Monday, the euro fell to 1.2740 dollars from a level of 1.2800 dollars reached in New York late on Friday.

Against the Japanese currency, the dollar edged up to 89.97 yen from 89.95 yen.
Traders said the market was looking ahead to interest rate decisions on Thursday from the European Central Bank and the Bank of England.

ECB chief Jean-Claude Trichet has hinted the bank is likely to put off lowering rates until March, although some traders still see a chance of a cut this week in light of the recent data.

‘Prospects for euro/dollar remain subdued,’ said Commerzbank analyst Antje Praefcke.
‘The sharp fall in the rate of inflation makes an ECB rate cut more likely and is therefore putting additional pressure on the euro.’

Lower interest rates weigh on currencies because they become a less attractive investment.

Inflation in the 16 countries using the euro dropped in January to a near 10-year low, slumping to 1.1 percent in the face of a sharp economic downturn, according to an official EU estimate issued before the weekend.

The fall brought 12-month eurozone inflation to the lowest point since July 1999 and was down sharply from the 1.6 percent that the European Union’s Eurostat data agency recorded in December.

MADRID, Dec 8 (Reuters) - The European Central Bank doesn’t exclude reducing the price of money rates again in the next few months, Executive Board member Jose Manuel Gonzalez-Paramo was quoted as saying. Gonzalez-Paramo said at a conference in Malaga which was reported by the Spanish newspaper La Opinion de Malaga, over the weekend, that the inflation outlook was improving.