Talk about ending the year in style! ECB President Mario Draghi came out with. Some rather dovish news, as he announced that the central bank had downgraded its GDP growth and inflation forecasts for 2013.
Earlier estimates had euro zone growth pegged at between -0.4% and 1.4% for 2013. Now, the bank expects growth to stumble in somewhere between -0.9% and 0.3%.
Meanwhile, inflation is seen to trickle in a at 1.1%-2.1%, after earlier predictions said it could rise to as much as 2.5%.
Now what does this have to do with the ECB’s monetary policy?
Lower growth forecasts? Subdued inflation? My young padawans, this just means that central bank now has more incentive and room to loosen policy further!
In fact, the ECB decided to extend its long-term financing program to banks that need additional liquidity.
As for interest rates, there apparently was some discussion about cutting rates sometime down the road, although consensus was to keep them steady for now. Keep in mind that unlike the BOE, the ECB does not reveal votes on interest rate decisions.
However, this does mean that talks of a rate cut could be gaining steam. With the central bank concerned about growth going forward, its no surprise that some market players thought that it may be time to short the euro!
EURUSD dropped following the rate statement, falling over 100 pips from its opening price. This is why its always important to pay attention to the accompanying statement!
Going forward, I honestly wouldn’t be surprised if the ECB goes ahead with another rate cut.
Afterall, both Spain and Italy are struggling, as evidenced by slumping manufacturing and services PMIs. France recently got downgraded, while Germany has also shown some cracks in its armor.
Across the Atlantic, the U.S fiscal cliff threatens to send Uncle Sam into another jam, which in turn would weigh down global demand.
Of course, Draghi did say that we could see growth pick up during the 2nd half of 2013. Hopefully his prediction comes true and we start to see more positive developments over the next few months.