MacroScope

Euro zone inflation falls again; economists base ECB rate cut calls on deja vu

Euro zone inflation has dipped again and some forecasters are hedging their bets on the policy response by saying the European Central Bank could either cut rates this week or sometime in the next two months.

That lack of conviction, although not a recent phenomenon, is driven by memory of the ECB’s surprise cut in November after a similar drop in inflation and a nagging belief that things have not worsened enough in the interim to warrant another.

Only two of 76 analysts - Barclays and IFR Markets – in a Reuters poll conducted before news on Friday that January euro zone inflation fell to 0.7 percent said the ECB would trim its refinancing rate below 0.25 percent this week.

Now a few more, including Deutsche Bank and RBS say they will. While many economists say the decision is a close call, most lack conviction over whether it will do any good.

Money market traders aren’t convinced either, despite the fall in bond yields in recent days and the sell-off in emerging market assets.

Another backhand volley from forward guidance

Forward guidance is quickly proving to be rather backward.

While it’s a favourite game of every punter who’s not paid to make predictions to trash the track record of those who are, just about everyone who follows the European Central Bank was stunned by the timing of its decision to cut rates on Thursday.

In the days beforehand, a handful of forecasters began speculating after news of a collapse in inflation that the ECB might fire what could be their last shot on standard monetary policy using interest rates in a long time.

But the vast majority were caught off guard by the ECB’s refinancing rate cut to a record low of 0.25 percent. Even those who thought it might do so didn’t think it would until December. The quick, violent fall in the euro showed it.

ECB rate cut takes markets by surprise – time to crack Draghi’s code


After today’s surprise ECB move it is safe to forget the code words former ECB President Jean-Claude Trichet never grew tired of using – monitoring closely, monitoring very closely, strong vigilance, rate hike. (No real code language ever emerged for rate cuts, probably because there were only a few and that was towards the end of Trichet’s term.)

His successor, Mario Draghi, has a different style, one he showcased already at his very first policy meeting, but no one believed to be the norm: He is pro-active and cuts without warning. Or at least that’s what it seems.

Today’s quarter-percentage point cut took markets and economists by surprise.

Reading the ECB runes, March edition

Economists seeking insight into the kind of analysis the European Central Bank is using to support its policy decisions can get hints from its monthly bulletin. Not for everyone, but here’s what is in March’s edition:

* The effective exchange rates of the euro – revised trade weights in the light of global economic integration

* Recent developments in the financial account of the euro area balance of payments