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