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2 May 2013
Forex Flash: ECB… to cut or not to cut?
FXstreet.com (Barcelona) - The single currency faces its major event risk today with the ECB meeting. Although the majority of analysts expect a 25 bp rate cut, further discussions are trying to assess the benefits, if any, to the ongoing fragile economic conditions in the euro area. Furthermore, negative interest rates are mentioned as one of the most effective measures, however the chances of implementing them were never even hinted at by the ECB.
Opinions, however, are divided amongst our contributors, as we can see:
“We have changed our ECB rates view: we are now forecasting a 25bp rate cut… We do not expect the ECB to take the deposit rate below zero as this may have unintended side-effects and thus will remain in reserve for worse case scenarios”, assessed Elwin de Groot, Analyst at Rabobank.
Marc Chandler, Strategist at BBH argued, “Yet there are reasons why an ECB rate cut is not a done deal. First, the refi rate is not the key rate in the current environment. It is the deposit rate, which is at zero and no one is seriously talking about cutting it… Given the tightening credit standards and the broken transmission mechanism for small and medium size businesses, it is not clear that a 25 bp refi rate cut would anything but symbolic. Some adjustment of collateral rules, perhaps reduced haircuts, would seem to have greater impact than a refi rate cut”.
“So with France looking a touch better but still very weak into April, and German surveys heading lower again, we think that will be enough to get the ECB debating the potential for up to 50 bps of cuts, but actually delivering a 25bps cut to the refi rate in May and leave the debate for further action until June”, pointed Jacqui Douglas, Analyst at TD Securities
Kit Juckes, Strategist at Societe Generale commented, ”It’s a close call because from Spain’s 27.2% unemployment to the ECB’s dismal bank lending survey there are plenty of reasons for more easing, but an ECB rate cut would achieve nothing more than drive the euro down, but that the ECB don’t seem to think is necessary”.
In addition, Derek Halpenny, Currency Strategist at BTMU signaled, “… expectations continue to build for an ECB rate cut… As we stated here this week, that is now our view, bringing the timing forward by a month. We still think the logical month would be June, coinciding with the updated forecasts but the rhetoric from numerous Council members can’t be ignored”.
“We do not expect a rate cut at the ECB meeting next week, based on one month of data weakness alone. Should data weakness persist, the ECB would cut in June. A risk is if the ECB was close to cutting last month”, added Lawrence Boone, Analyst at BofA-ML.
“A cut in the deposit rate appears unlikely at this stage but it is possible that the ECB will introduce a non-standard instrument targeted at improving conditions for small- and medium-sized companies”, assessed Chief Analyst Allan von Mehren at Dansske Bank.
And finally, Syed Mansoor Mohi-uddin, Strategist at UBS, suggested, “Thus for now we think investors shouldn’t chase the dollar lower against the other major currencies. Instead looser monetary policy in the rest of the world will help stop the dollar sliding further. Today the European Central Bank meets. UBS Economics expects the ECB refinance rate to be cut by 25bps to 0.50%”.
Opinions, however, are divided amongst our contributors, as we can see:
“We have changed our ECB rates view: we are now forecasting a 25bp rate cut… We do not expect the ECB to take the deposit rate below zero as this may have unintended side-effects and thus will remain in reserve for worse case scenarios”, assessed Elwin de Groot, Analyst at Rabobank.
Marc Chandler, Strategist at BBH argued, “Yet there are reasons why an ECB rate cut is not a done deal. First, the refi rate is not the key rate in the current environment. It is the deposit rate, which is at zero and no one is seriously talking about cutting it… Given the tightening credit standards and the broken transmission mechanism for small and medium size businesses, it is not clear that a 25 bp refi rate cut would anything but symbolic. Some adjustment of collateral rules, perhaps reduced haircuts, would seem to have greater impact than a refi rate cut”.
“So with France looking a touch better but still very weak into April, and German surveys heading lower again, we think that will be enough to get the ECB debating the potential for up to 50 bps of cuts, but actually delivering a 25bps cut to the refi rate in May and leave the debate for further action until June”, pointed Jacqui Douglas, Analyst at TD Securities
Kit Juckes, Strategist at Societe Generale commented, ”It’s a close call because from Spain’s 27.2% unemployment to the ECB’s dismal bank lending survey there are plenty of reasons for more easing, but an ECB rate cut would achieve nothing more than drive the euro down, but that the ECB don’t seem to think is necessary”.
In addition, Derek Halpenny, Currency Strategist at BTMU signaled, “… expectations continue to build for an ECB rate cut… As we stated here this week, that is now our view, bringing the timing forward by a month. We still think the logical month would be June, coinciding with the updated forecasts but the rhetoric from numerous Council members can’t be ignored”.
“We do not expect a rate cut at the ECB meeting next week, based on one month of data weakness alone. Should data weakness persist, the ECB would cut in June. A risk is if the ECB was close to cutting last month”, added Lawrence Boone, Analyst at BofA-ML.
“A cut in the deposit rate appears unlikely at this stage but it is possible that the ECB will introduce a non-standard instrument targeted at improving conditions for small- and medium-sized companies”, assessed Chief Analyst Allan von Mehren at Dansske Bank.
And finally, Syed Mansoor Mohi-uddin, Strategist at UBS, suggested, “Thus for now we think investors shouldn’t chase the dollar lower against the other major currencies. Instead looser monetary policy in the rest of the world will help stop the dollar sliding further. Today the European Central Bank meets. UBS Economics expects the ECB refinance rate to be cut by 25bps to 0.50%”.