Trichet's farewell - will the ECB cut interest rates?
The European Central Bank will decide on its next monetary policy on Thursday 6 October at 11:45 GMT and this month the market is pricing in an interest rate cut as the eurozone debt crisis deteriorates.
During the last few months the eurozone economy has been battling with an escalating debt crisis while countries on the periphery have been flirting with the risk of default. The euro started falling last week against all its major counterparts as the future of the eurozone seemed far from promising. Even when European officials decided to extend the size of the European Financial Stability Facility to handle the fallout from debt problems for the likes of Italy and Spain, this failed to stabilise risk sentiment in the market.
Greece now appears to be closer to default than previously thought, even though the government announced new and more painful austerity measures in order to meet its fiscal targets and secure the next tranche of funding.
Rating agency Moody's downgraded Italy's rating by three notches on Tuesday citing an increase in funding risk as the country has a high level of debt. Economic data is not helping the situation either with industrial new orders, consumer confidence and retail sales all showing worse than expected figures, emphasising further the slowdown of the eurozone economy.
As the next interest rate meeting is approaching, there is speculation that the central bank will act to boost the economy from falling further. This will be the last interest rate meeting that the ECB President Jean-Claude Trichet chairs and the question in investors' minds is whether he will decide in favour of monetary easing and not leave this task to the next President.
During the last interest rate meeting, the ECB President Jean Claude Trichet dropped previously-used phrases such as upside inflation risk and downgraded the eurozone growth forecast for this year. His comments resulted in speculation of a shift in the central bank's monetary policy, after hiking the rates twice this year.
One scenario is that the central bank will announce a 25 basis points interest rate cut which may already be priced in market expectations and a muted reaction is expected. Another scenario is a 50 basis points cut in the benchmark interest rate. This may increase investors' risk appetite as they hope for a eurozone economic recovery, which in turn may push the euro higher. But will this be an easy decision? Not if we focus on the higher than expected September's Consumer Price Index which showed a gain of 3%, higher than the central bank's target of 2.5%.
Investors' real focus will be on the press conference by Trichet which follows the ECB's interest rate price announcement. Trichet is expected to express the central bank's forecasts and possibly offer some hints as to the next monetary policy moves. Whatever the outcome, Thursday will provide an insight into Europe's economic picture. Will we witness a euro rebound or will the ECB knock the euro to a lower ground? Only time will tell.
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