Â·ECB and BoE cut
interest rates by 50 basis points
Â·ECB open to
further rate cuts, considering additional measures
Â·US job losses continue
ECB: remarkably realistic
first, weak economic data and the sustained fall in share prices continued to
boost the dollar. In
the middle of the week, USD-JPY rose to a peak of 99.68. EUR-USD slipped
temporarily to 1.25. Towards the end of the week, however, a counter movement,
triggered by Chinaâ€™s
Premier Wen Jiabao, set in. Although he did not confirm the rumours circulating
about the economic stimulus package being extended, he did stress the
governmentâ€™s determination to achieve its growth target of 8 per cent, despite
the global economic crisis.
appearing as it did just before the interest rate decisions of the ECB and the
were due, this tiny spark was not sufficient to have a sustained impact on the
market. After the 50 basis point interest rate cuts to 1.50 and 0.50 per cent
respectively, the euro and the pound fell back temporarily. Once again, EURUSD made
a brief foray below 1.25, only to retreat to familiar territory again.
the risks perceived for the eurozone, the United
and other countries, market participants did not have all that much faith in
currency either. This was understandable, as there seems to be no let up in bad
news from the US.
The week started with the news that AIG had made a record loss of $61bn in the
fourth quarter. Then the rating agency Moodyâ€™s announced that it had changed
the outlook for the three largest US
banks to negative. Towards the end of the week, the dollar was also weighed
down by the US
labour market report. The ADP indicator and initial jobless claims in particular
suggested that the unemployment rate would go on rising to record levels. In
fact, a further 650,000 jobs were lost in February.
this backdrop, EUR-USD firmed to around 1.27, USD-JPY fell back to 97. This
reaction, i.e. the dollar weakening on signs of crisis in the US,
is, however, in complete contrast to the pattern of the past months, when thedollar
and the yen had generally been regarded as â€śsafe havensâ€ť. After the release of
the Japanese GDP data, the yen had lost this status. The dollar situation could
now be returning to normal to some extent, so that bad news from the US
would be bad for the dollar again. The fact that the differences in the
monetary policy of the major central banks are fast disappearing would also
back up this argument.
ECB, which has up to now rather grudgingly eased monetary policy, now seems to
be facing the facts. ECB staff,
who are responsible for making the projections, have revised their forecasts down
drastically. If, to simplify matters, we look at the middle of the ranges, the
ECB is now expecting real GDP to decline by 2.7% in 2009, and to stagnate in
2010. According to the staff
projections, the inflation rate in the eurozone will fall to 0.4% this year,
and be around 1% only in 2010.
our view, two points are particularly remarkable: (1) The central bank is no
longer assuming that things will sort themselves out during the course of this
year. A gradual recovery is now not expected to set in before 2010. (2) The ECB is seeing increasing evidence that
weak demand in the eurozone and all over the world will continue to dampen
inflation in 2009 and thereafter. In fact, the ECB admits that the price
stability target of â€śjust under 2%â€ť could be undershot in the
50 basis point interest rate cut was in line with market expectations. On the
subject of further interest rate movements, Jean-Claude Trichet was fairly
tight-lipped at the press conference. He confirmed that at 1.5% there was still
some scope; he did not want to commit himself to a minimum level for the
refinancing rate, but commented that, at 0.5%, the deposit rate was â€śvery very
lowâ€ť. Given the macroeconomic risks, the ECB is evidently keen to keep all
options open. One of the options is to implement non-standard measures.
According to Mr Trichet, the ECB governing council is currently discussing
whether such measures are necessary and how they could be implemented. He did
not categorically exclude anything, but hinted that ways of improving credit conditions
were taking priority at the moment.
our view, the ECB reached a decisive turning point last Thursday. Given the
sustained escalation of the economic situation, the ECB will probably reduce
interest rates further in April. In the course of the second quarter, it will
presumably start implementing additional measures.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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