What’s the surprise at the upcoming ECB meeting? a 50 bp cut is baked in the cake, but to my mind I think there is a better than 50% chance that the announce and immediate move to begin quantitative ease. They’ve made clear that they have no intention to cut rates to zero, just as they’ve made clear they continue to explore non-conventional methods of easing policy. The data received by the ECB in the last 6-weeks has been hair-raising enough to get them to begin buying bonds to pump up the money supply in the near future.
Trichet admitted as much on Monday as he acknowledged that yes, in fact there has been a credit crunch in Europe, after months of denying the obvious.
I also think there is a non-trivial chance that they go-ahead and front-load the rate cut to 1%, but suspect there is a better chance of a move to “credit ease” along with a 50 bp cut.
The euro would likely fall in knee-jerk fashion on the ECB adopting quantitative ease and/or a more aggressive rate cut but end up firmer in the days following the meeting as the market rewards them for getting back on the curve after falling way behind.
