European Central Bank's Analysis after Cuts in Rates
The European Central Bank's analysis in the aftermath of its decision to cut official short rates to the historical low of 2% yesterday shows important shifts of emphasis. The stress on keeping inflation below but close to 2% in President Wim Duisenberg's statement bolsters our view that, despite his repeated protestations, there is high internal sensitivity to the potential for weak economic growth and a rising currency to bring lower consumer prices.
The ECB is anxious that any discussion of 'deflation' could be self-fulfiling - Angst over a consumption halt à la 1930s that is unfounded, in our view. But euro area HICP at or around 1%y/y over the next months is probable. Thus, the ECB analysis leaves open the possibility of further cuts in rates, but not until after the summer.
It is significant that in a news conference of around 5,000 words, the word 'demand' appeared only once - and then in the context of out-of-area demand picking up. Despite this, the ECB analysis now shows much more sensitivity to economic growth than previously. This may be needed; German private sector loan growth has turned negative now; French is running at just 1.6%y/y. This is the second of a two part report.
Summary Asset Conclusions: ECB has opened door to more rate cuts after summer since its central scenario continues to be a further euro/dollar rise
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© Graham Bishop
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