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ECB Disappoints With 50bp Cut, Trichet’s Comments

 November 06, 2008 10:07 AM

It is the morning for rate cuts with the European Central Bank, Bank of England and the Swiss National Bank all cutting interest rates. On a day when the Bank of England shocked the markets with a 150bp rate cut, the ECB and the SNB's half point cut seemed very small in comparison.

Every major central bank is worried about growth but not as worried as the ECB. Unlike King who openly admitted that the economy is in a recession, when asked the same question, Trichet simply said "we will see." On future rate cuts, he said that the ECB never pre-commits . If Trichet was serious about cutting interest rates aggressively, he would not be qualifying his comments on inflation and future rate cuts.

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 In his post meeting press conference, ECB President Trichet was not as bearish as he could have been given the sharp deterioration in growth.

He spent the majority of his time discussing inflation and how it is set to ease but skirted over growth and the economic outlook. Larger rate cuts was discussed but the decision to cut by 50bp to 3.25% was unanimous. Compared to the BoE, the ECB's tone is less dovish.

The ECB is a much more conservative central bank and it is clear that their monetary policies are more restrictive. They have only cut rates by 75bp this year when taking into account their rate hike in July.

More rate cuts will come from the ECB, but Trichet's comment about not pre-committing to rate cuts indicates that they will not be making rate cuts in excess of 100bp like the BoE. Trichet feels that he has already done a lot by cutting interest rates twice in 1 month.

[Related -How Much Longer Can Our Unaffordable Housing Prices Last?]

The sharp divergence in the actions taken by the ECB and the BoE today should help the Euro recover against the British pound. Source: eSignal

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