Trading Levels and Reports for October 4, 2012

The ECB holds a press conference following the announcement where some rationale for their decision is offered. Market participants pay close attention to the press conference, hoping to clue in on the likelihood of further rate changes. Often, the language used in the press conference holds important signals to how the ECB feels about inflation and the economy.

Howard Archer, economist at HIS global insight says “It seems highly likely that the ECB will take interest rates down from 0.75% to 0.5% in the 4^th quarter. While the ECB could act as soon as its October meeting, we lean towards the view that they will probably hold off till November.”

This viewpoint is backed up by the consensus reading of economists polled by Reuters. Only 14 of the 73 surveyed expect the ECB to cut rates at the October 4^th meeting, but a majority expect them to do so by the end of the year.

Nick Matthews, a Senior European Economist at Nomura also expects no major policy announcements at the latest meeting. “We do not expect any movement on rates as the Governing Council continues to see no urgency to cut rates again” the Economist notes. Furthermore, “while the ECB is likely to continue to expect inflation to remain in line with price stability over the policy-relevant horizon, we expect the Council to continue to stress that renewed intensification of financial market tensions could affect the balance of risks for both growth and inflation.” He notes that recent comments from within the Executive Board, have reinforced this wait-and-see attitude on rates.

ECB executive board member Coeure speaking on September 23^rd said as much when he stated that policy makers may not reduce interest rates further as confidence in the euro-area’s economic outlook improves and inflation stays high. “The jury is open as to whether there should be another rate cut,” Coeure told reporters in the West Bank City of Ramallah where he was attending a conference. “It’s not absolutely obvious that another rate cut would be necessary.”

What does the market expect?

After some fluctuation in Euribor rates at the start of the week, 3-month rates continued heading lower, hitting fresh record lows on Wednesday. Although a significant portion of the fall is due to expectations of further rate cuts, this is, generally speaking, not factored into this month’s meeting, and is more attributable to rate cuts down the line and the massive amount of excess liquidity in the banking system.