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1 Nov 2013
Flash: Downside inflation makes it probable that the ECB acts in December - BTMU
FXstreet.com (Athens) – Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ suggests that since ECB President Draghi has repeatedly emphasized that the bias of the ECB is to ease, this surprise downside inflation print makes it probable that the ECB acts in December.
Key Quotes
“And it is worth noting that this is an underlying story too. The core inflation rate fell to 0.8% in October, matching the record low set in early 2010. With its legal mandate not being met, an interest rate cut is a lot more likely than any measure to add liquidity to the system. Hence, the refinancing rate would be cut by 0.25 point to 0.25%.”
“We doubt the deposit rate would also be cut but President Draghi would no doubt stress that this option was still “on the table” going forward. We have also argued recently that QE in of itself is not necessarily the driver of the dollar – it is how other central banks respond to QE.”
“So if the ECB cuts it probably will not be enough to drive the euro weaker versus the dollar but should certainly be enough to temper EUR/USD gains higher from here. The risk of a breach of 1.4000 has certainly been reduced considerably for now.”
Key Quotes
“And it is worth noting that this is an underlying story too. The core inflation rate fell to 0.8% in October, matching the record low set in early 2010. With its legal mandate not being met, an interest rate cut is a lot more likely than any measure to add liquidity to the system. Hence, the refinancing rate would be cut by 0.25 point to 0.25%.”
“We doubt the deposit rate would also be cut but President Draghi would no doubt stress that this option was still “on the table” going forward. We have also argued recently that QE in of itself is not necessarily the driver of the dollar – it is how other central banks respond to QE.”
“So if the ECB cuts it probably will not be enough to drive the euro weaker versus the dollar but should certainly be enough to temper EUR/USD gains higher from here. The risk of a breach of 1.4000 has certainly been reduced considerably for now.”