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ECB Rate Cut May Fail to Impress the Market
Submitted by Tradervox 2 on Wed, 04/07/2012 - 10:06
Tradervox.com (Dublin) – There are very strong speculations in the market that the European Central Bank officials will vote to cut interest rate to 0.75 percent as well as cut deposit rate to zero. However, this giant leap by the ECB President Mario Draghi may not suffice revert sentiments in the region but will probably make a limited economic gain for the short term. If the central bank reduces the interest rate and cuts deposit rate to zero, there will be speculation on how much room will be left for ECB to act if the situation in the region worsens.
Central banks around the world have embarked on measures to boost their respective economies as signs of recession continue to grow. The Federal Reserve decided to extend operation twist which extends the maturity of assets on the balance sheet hence lowering longer-term yields in financial market. Other central banks such as Czech Republic, China, Vietnam, Israel and Kazakhstan have also cut their interest rates. The Swiss National Bank has embarked on a program to buy euros as it tries to protect the franc cap. In Draghi’s comment last month, he questioned the effectiveness of reducing interest rate which he said had relatively limited effect in the short term.
However, these comments were made before the regions data deteriorated with unemployment rising to a new record of 11.1 percent in May. Further, services and manufacturing sector have seen a contraction in June while economic confidence in the region has dropped to the lowest in more than two-and-a-half years. With such deterioration, economists expect Draghi’s opinion about interest rate cut to change and this might be portrayed in the ECB meeting to be held tomorrow. Despite Draghi saying in June 15 that the 2.4 percent inflation rate does not pose a risk in the euro area countries, it is expected to add to pressure of cutting the interest rate. The ECB has a 2 percent inflation target.
The ECB is between a rock and a hard place when it tries to make its decision as economists will also be looking at what else it can do once it reduces the interest rates close to zero.
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