After having cut interest rates by 50bp this morning to 2 percent, ECB President Trichet is finally buckling down and signaling that he is ready to cut interest rates again BUT NOT UNTIL March. Despite the weakness in the economy and softer inflation pressures, the hawk in Trichet refuses to die. By saying that the Feb meeting will not be important suggests that pausing is still an option. The next meeting that matters is in March at which the ECB will release new projections. The Feb meeting is only 3 weeks away but by March, they will have alot more economic data to base their decisions. The possibility that the ECB could leave interest rates unchanged next month is driving the Euro higher. We will probably see the Euro recover for the rest of the week but it is important for FX traders to realize that Eurozone interest are still coming down. Zero interest rates is not an option but the terminal rate for the ECB is likely to 1.25 percent.
Up until now, Trichet’s biggest concern is price stability and for the first time in this easing cycle, he believes that the risks to price stability is broadly balanced. This is a big shift for the central bank and one that should not be ignored. The 50bp rate cut today reflects weaker growth and lower inflation risks. Alot has changed since the last meeting as the problems in the Eurozone economy worsen. Not only is the region in recession but many countries are at risk of getting their sovereign debt rating downgraded. Greece’s credit rating was cut by S&P yesterday. There are no silver linings for the Eurozone. Unemployment is rising and consumer spending is contracting. According to the Trichet, the risks to growth are certainly to the downside Eurozone governments will have to dig deeper into their own pocketbooks to deliver enough fiscal stimulus to turn their own economies around. Over the next few months, we expect weaker economic data that provides more of evidence of the continual slowdown in the Eurozone economy.