The euro scored its largest daily loss against the dollar earlier this week. Why? It was all thanks (or no thanks) to ECB council member Jens Weidmann, who suggested that the bank should seriously consider cutting interest rates. Uh oh…
When the news hit headlines, the euro dropped like a rock against its counterparts. EUR/USD finished with a hefty 166-pip loss following his remarks on Wednesday.
But what are the chances of an ECB rate cut? Some market junkies believe that it’s pretty darn possible. Here are three reasons why:
#1: The ECB is “ready to act.”
The idea of the cutting rates isn’t actually new for the ECB. In the central bank’s latest rate statement, ECB President Mario Draghi said that they will “monitor very closely” all economic data from the euro zone and warned that they are “ready to act.”
Some think that the recent data from the region are only giving policymakers more reasons to go ahead and cut rates.
For instance, the ZEW economic sentiment index for March showed that confidence for the euro zone dropped from 33.4 in February to 24.9. Meanwhile, Germany’s Economic Institute cut its growth forecasts for the country to 0.8%, after initially estimating growth to print at 1.0% for 2013 last October.
To top it off, euro zone’s annual inflation came in well below the ECB’s 2.0% target at 1.7% in March, giving the bank room to ease.
#2: Jens Weidmann suggested it.
Jens Weidmann is not only a member of the ECB council, capable of influencing the central bank’s major decisions. He is also the President of the Germany’s central bank (aka Bundesbank).
It’s noteworthy to mention that he gave a speech later on in the week, saying that the currency is appropriately-valued. However, some market junkies don’t buy it. His earlier comment has been perceived by many as a sign that he is already pressured to do something in order to help the domestic economy.
#3: The clock is ticking for the ECB.
But more than that, his remarks have a deeper significance. My guess is that Weidmann suggested a rate cut because he feels that the central bank is running out of options.
Mario Draghi talked about how the bank could set up a lending program that would keep companies from being cut off credit. But so far, we haven’t heard of any plans on how they could boost small- and medium-sized businesses. Engaging in quantitative easing, like the Fed, also seems to be out of the question. Since it would involve buying government bonds with already record-low borrowing costs, it may only prove ineffective.
Given these, a few market junkies have already priced in a rate cut from the ECB sometime in May or June.
If you ask me though, we shouldn’t get too excited just yet. A rate cut is a major monetary policy decision. European policymakers may want to save it when the economy shows further deterioration and the bank really has no other choice.
What do you think? Will the ECB cut rates soon or do you think we still have to see more negative figures?