By dragging it’s feet the ECB has put itself into a tremendously difficult spot as they prepare to meet later this week. They clearly led the market to believe that they would cut rates to their lowest level, presumably 1% on the refi rate, and embark on quantitative ease in May at their April meeting. They have done nothing to back off that stance thus far, going so far as to outline the timing of the policy (Weber said it would last through mid-2010).
In the interim, global economic data has taken a turn for the better. This leaves the ECB in a difficult position. So they surprise the market and renege on their pre-commitment or do they go ahead with their plans?
Against the improved global backdrop, going ahead with a cut in official rates and moving to greater “non-standard” measures would imply that while the worst may be over for the US and China, Europe is still lagging behind. EU finance ministers sounded like they see European lagging.
In recent days we have seen the RBA refrain from cutting rates and the Bank of Canada has delayed taking quantitative steps. Will the ECB have the nerve to stick to their guns? It would appear to be a case of damned if they do and damned if they don’t.
