Want to know what the ECB is going to do? Watch the German PMI

April 23, 2013

A sudden turn for the worse across German companies should clinch an interest rate cut from the European Central Bank next week, or in June at the latest.

That’s because the latest PMI surveys, which have a decent correlation with economic growth, suggest the German economy ¬†shifted back into reverse this month, against the expectations of economists.

And the one thing the ECB’s Governing Council never allows to pass is any sign that Germany, Europe’s No.1 economy, is floundering.

The German composite PMI has only ever crossed under the 50 point mark that separates growth and contraction on four occasions since Sept. 2008, including Tuesday.

On the previous three occasions, an ECB rate cut followed immediately after publication of the final data, or the month after.

With the central bank’s policymakers sounding more dovish by the day, an interest rate cut to a new record low 0.5 percent is back on the cards.

“With Germany unable to offset the austerity and credit crunch drag on growth in the periphery, and with excess capacity growing and business expectations falling, the only question is why the ECB has not cut rates already,”¬†said Lena Komileva, director of G+ Economics in London.

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Why the ECB has not cut rates already?
May be because, given the fragmentation in the EZ, this way the ECB wouldn’t get lower rates where it is needed, making them fall where they are already too low. So it would be useless at best, more likely harmful.
If our problem is to finance SMEs, our solution is a non-standard measure thought out on this goal.

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