The ECB meets tomorrow and is expected to deliver another 50 bp cut. Something like 54 out of 54 economists see that outcome. When they’re all headed in the same direction what do I do? Get ahead of them!
The ECB is nothing if not predictable but I sense they’ve been sending subtle signs that they are at least entertaining the notion of adopting quantitative ease with any number of members saying they are exploring unconventional methods. The most aggressive advocate for QE is former Fed economist Orphanides, now governor of the Bank of Cyprus.
The one thing the ECB has made clear is that they will not take rates all the way to zero, with some postulating 1% could be a floor. My guess is that the ECB will get such a fright after seeing the staff projections they rely so heavily upon that they will move more aggressively than the market anticipates. I think they cut to 1% tomorrow and either unveil quantitative ease or make very clear it is ready to embark on that course.
I’m way out on a limb here but the deterioration in Europehas to have gotten the attention of the usually unflappable Monsieur Trichet.
At the BOE, they’ve been much more upfront. They fully expect to receive permission from Her Majesty’s government to embark on quantitative ease tomorrow. A 50 bp cut in the Bank rate to 0.5% is expected.
Expect little reaction from the pound if the BOE follows the above course but expect a knee-jerk selloff in the EUR if the ECB follows my prescription. I expect weakness to be short-lived however as both the dollar and the pound recovered from the “shock” of signals that novel monetary policy tools would be tried. I expect the market to learn its lesson quickly. The Euro may even benefit in the medium-term from the perception that the ECB has finally gotten near or ahead of the curve.
