ECB Preview

March 3, 2009

Despite verbal efforts by European Central Bank officials to temper market speculation that it will follow the lead of other monetary authorities and move eventually to zero or near-zero interest rates, I am as confident about a 50-basis point rate cut by the ECB on Thursday as I am about a Bank of England rate reduction that day of that same amount.  The ECB made a show of force, figuratively declaring its independence, in February by leaving its key rate then at 2.0%, which matches but does not exclusively represent the lowest rate level in the Bank’s ten-plus year history.  March affords an opportunity to surround a rate cut with new quarterly growth and price forecasts.  The now-optimistic forecasts from December had projected growth of zero to minus 1% in 2009 followed by 0.5-1.0% in 2010.  The range estimates for CPI inflation were 1.1-1.7% in 2009 and 1.5-2.1% in 2010, and they are clearly too high.

GDP last quarter fell 5.9% at an annualized rate.  Germany (-8.2%) and Italy (-7.1%) did worse than the euro area average, while Spain (-3.8%) and The Netherlands (-3.4%) did somewhat better.  The present quarter is likely to see even weaker growth than last quarter.  This is suggested by composite PMI scores of 38.3 in January and 36.2 in February, a 43.3% annualized plunge of industrial orders last quarter, a drop in economic sentiment to 65.4 in February from 78.4 three months earlier, declines in December of 5.3% in exports and 9.1% in imports, decelerating money and credit growth, a rise of the jobless rate to 8.2% in January from 7.6% in September, and Eastern Europe’s mounting financial and economic difficulties.  CPI inflation is now hovering just above 1.0% and lies below its target floor.  ECB officials have predicted such will drop significantly lower, perhaps below zero for a while in 2009, but then revert to the black and move closer to target deeper into the medium-term target horizon.

The ECB rate announcement from Frankfurt will be made at 12:45 GMT on Thursday and be followed by Bank President Trichet’s press conference starting at 13:30 GMT.  April’s interest rate meeting of the ECB Governing Council is scheduled for the 2nd. 

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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