ECB Rate Cut

[thebandit]

From RTE.IE

ECB interest rate cut by 0.75 points
  Thursday, 4 December 2008 19:40
The European Central Bank has cut its interest rate by 0.75%, its biggest ever move as inflation plummets and the Eurozone economy sinks deeper into recession.

The move takes the ECB's main refinancing rate to 2.50%, its lowest in nearly two and a half years.

It is the third cut in barely two months amid signs that the financial crisis is biting hard into the real economy.

AdvertisementMany commentators expect rates to fall further in the short-term, as the Eurozone moves deeper into recession.

The rate cut was modest compared with a 100 basis point reduction made by the Bank of England and a huge 175 cut by Sweden's central bank earlier in the day.

But Mr Trichet noted that it was the ECB's third cut in little more than two months, meaning that euro zone interest rates were now 175 basis points lower than they were in the summer -- a scale of cuts rarely seen in continental Europe since World War II.

'Inflation rates are expected to be in line with price stability over the policy-relevant horizon, supporting the purchasing power of incomes and savings', he told a news conference.

'The decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity.'

Eurozone inflation plunged by 1.1 percentage points in November, the biggest drop since the Eurozone was created 10 years ago.

Some economists have talked about the threat of deflation hitting the Eurozone, where consumer prices fall across the board for a lengthy period, and can hit economies severely.

But Mr Trichet played down these risks, stressing that falling inflation rates did not equate to deflation.

[Pangurban]

Is there any point in saving Money

[thebandit]

Is there any point in saving Money

Doesn't look like it...and rates will fall again imo

[the Deel Rover]

another 1/2 % cut by the ecb today some good news for mortgage holders

[thebandit]

another 1/2 % cut by the ecb today some good news for mortgage holders

Nice one

[full back]

Am I right to assume that the euro will fall against the sterling now?

[muppet]

If that rate cut were the only thing going on in the financial world for a few months that would be a reasonable assumption.

The problem is that more cuts are expected everywhere so it is hard to predict and there is a rumour (denied by the Government last week) of Britain possibly printing money which would put downward pressure on Sterling.

In conclusion who knows?

[bennydorano]

If that rate cut were the only thing going on in the financial world for a few months that would be a reasonable assumption.

True, normal indicators dont seem to be having their historical impact.  As of 3.15pm today Sterling had risen 0.00170% against the Euro to be in around £1 = €1.11.  Britain has been releasing bad economic figures all week which have affected sterling when it would 'normally' be surging against the euro.

[bennydorano]

Love reading this guy in the Times.  Fair to say he's probably in a minority.

From The Times
January 12, 2009
Eurozone may be next for a test to breaking point
Anatole Kaletsky
What lies ahead for the world economy and financial markets? Having been almost entirely wrong in my predictions for 2008, as explained in this column two weeks ago, embarking on a similar exercise for the year ahead may seem foolhardy and futile. But the point of thinking about the future, even when one turns out to be wrong, is to try to understand the present and to distinguish those events that are predictable and humdrum from those that genuinely change the world.
In 2008, the event that genuinely changed the world was not the credit crunch, whose consequences could be reasonably predicted last January.

It was a catastrophic interaction of governmental and managerial incompetence that led to the collapse of Fannie Mae and Lehman Brothers and hence the near-collapse of every big financial institution in America, Britain and Europe. That financial crisis, in turn, was what triggered the sudden implosion of economic activity around the world from last September onwards. Thus was a limited and manageable problem in one part of the US property market and banking sector suddenly transmogrified, largely because of the Bush Administration's ideological tunnel-vision, into the worst financial crisis that the world had ever seen — and one completely out of proportion to the underlying imbalances in the world economy and financial system before Lehman was forced into bankruptcy on September 14.

If this analysis is even partly correct, then the most important event of 2009 should be obvious. It will be the replacement of the worst President and worst Treasury Secretary in US history with individuals better qualified to do these jobs. Personal leadership matters in economic crises, just as it does in revolutions and wars. Paul Volcker's arrival at the Federal Reserve Board ended the inflationary crises of the 1970s and changed economic history, as surely as Churchill's ousting of Chamberlain changed military history — or Donald Rumsfeld's replacement by Robert Gates changed the course of events in Iraq. It seems reasonable to expect, therefore, that conditions in the world economy will change gradually for the better after the Obama Administration comes in next week — not necessarily because Barack Obama will be a great leader, although he may be, but simply because he will avoid making everything much worse. Assuming that this turns out to be true, and President Obama's economic team merely refrains from further Paulson-style blunders, what are some of the surprises that might occur in the year ahead?

Although the US economy will certainly suffer another few months of severe contraction and job losses, signs of recovery could start to appear in the property and financial markets by the early summer. The real economy, too, should rebound fairly sharply, because the collapse of industrial production since September 14 has been so severe that inventories will soon be at rock-bottom levels. As a result, factories will have to start ordering inputs and hiring new workers more quickly than usual once they see consumer spending revive. But what could trigger a revival in consumer spending? The answer is fairly clear: the unprecedented combination of zero interest rates, unconventional monetary policy (especially the direct funding of mortgages and commercial loans by the Federal Reserve) and a $1trillion fiscal stimulus plan.

A related surprise from America this year could be that the seemingly profligate expansion of budget deficits, far from undermining America's reserve currency status, actually strengthens the dollar. This may sound perverse, especially since there were rumours last week that credit-rating agencies might downgrade US government debt because of the unprecedented size of the proposed fiscal stimulus. But the idea that organisations as discredited by the credit crunch as Moody's or S&P should have any opinion at all on the US Treasury's credit is inherently absurd — like asking Bernie Madoff to opine on the integrity of the Supreme Court. And even if the rating agencies still commanded the prestige they once enjoyed, their analysis of sovereign credits borrowing in their own currencies has always been a joke. Remember June 2002, when Moody's downgraded Japan to a lower rating than Botswana and Estonia? In the following 12 months, Japanese bonds did not collapse as Moody's expected. Instead, they enjoyed the most astonishing rally of all time, with ten-year yields falling to 0.5 per cent by mid-2003. History shows, in fact, that the sovereign bonds of leading economies rarely, if ever, respond to mushrooming fiscal deficits or to alleged credit risks.

Indeed, the previous record for the US deficit-to-GDP ratio was set in 1982-83, the year that marked the start of the biggest bond bull market in history.

A similar argument applies to the dollar. If the US is in such trouble that its fiscal deficit is exploding, other big economies will suffer as much or more. As I have often said, currency investment is not a beauty contest but an ugly contest, especially in a recession. Investors who refuse to accept credit risk must keep their bonds in some currency or other. And far from suffering unusual credit risks, investors in the dollar will enjoy a crucial advantage: while the US has the confidence to borrow its way out of recession, the rest of the world tends to rely on exports to stimulate growth — and this is particularly true of "hard currency" countries, such as Japan or Germany. As a result, these countries will naturally want to devalue, while the US may be willing to let the dollar rise. This is essentially what happened in all four of the past recessions and it could happen again. If Obama follows a Reagan-style policy of tax cuts and deficit financing, the dollar is likelier to rise than to fall. And the US economy could surprise most observers by staging a "roaring recovery", just as it did in 1983 and 1984.

For the rest of the world, a strong-dollar recovery in America would obviously do wonders for business and consumer confidence. However, there is a downside risk, especially in the eurozone, but also in Britain: the tardy and muddled policy response from governments and central banks outside the United States. From this point of view, the timid half-point rate cut last week from the Bank of England was, for me, a huge disappointment.

There were two reasons for disappointment. As long as interest rates remain significantly above zero and the Bank appears to have scope for further cuts, Gordon Brown and the Treasury will have an excuse to procrastinate, instead of taking the decisive actions to guarantee mortgages and commercial credit that are clearly now required.

A second reason for regretting the Bank's modest rate cut was the currency effect. The Bank's bold decision in early November to slash its base rate by 1.5 percentage points triggered the sharp fall in the pound, which Tory politicians and media commentators described as a crisis or panic but which was actually the best event for the British economy last year. With sterling now one of the world's most undervalued currencies, it is not just manufacturers and exporters that are gaining. London estate agents have reported a big increase in foreign inquiries and shops in Bond Street are packed with French, German and Chinese consumers. A less remarked, but more significant benefit of devaluation is in the economy's most troubled sector - wholesale international finance. While salaries are being slashed for senior jobs in investment banks and hedge funds, these salaries are mostly set in dollars or euros - and because of the devaluation of the pound, London's financiers are not going to have their spending power curtailed as much as their colleagues in Frankfurt and New York. The bad news is that almost half of Britain's year-end devaluation was reversed last week - and a stronger pound is the last thing that Britain needs in the first half of 2009.
Having said all this, I would expect the Bank to respond to a stronger pound with further rate cuts and more unconventional measures to expand the money supply. Assuming this happens, economic conditions in Britain should improve significantly by the middle of 2009. In the year ahead, the focus of global economic troubles is likely to shift from Britain and America to continental Europe, with its unresponsive central bank, its overvalued currency and its squabbling politicians. If 2008 was the year in which the Anglo-Saxon economic model was tested to destruction, in 2009 it may well be the turn of the European single-currency zone.

[Tankie]

I want to buy some STG, this cut is not good for me!!!

[the Deel Rover]

Just announced on the news there ecb drop the rate by .5 % and bank of england also drop the rate by .5% 

[the Deel Rover]

So there was another cut of .25% again yesterday now at an all time low of 1% . Eddies Hobbs said that now was the time to fix it for 10 years what do ye think of that advice lads ?

[lynchbhoy]

So there was another cut of .25% again yesterday now at an all time low of 1% . Eddies Hobbs said that now was the time to fix it for 10 years what do ye think of that advice lads ?

now would be the time to fix it,
but you still could be doing better by paying variable, as even when things start moving again, you will have paid three or four years higher interest and theres no guarantee that interest rates will go up that badly
certainly france and germany etc would go mad if they were to pay more than the interest rates were up to at its peak a year or two ago
- they never had high interest rates like we did decades ago.

personally I'll never fix my mortgage again. variable rates will do just nicely thanks.

plus - in ten years time my mortgage will be paid off anyhow!

[Croí na hÉireann]

So there was another cut of .25% again yesterday now at an all time low of 1% . Eddies Hobbs said that now was the time to fix it for 10 years what do ye think of that advice lads ?

Probably sound enough if you want to fix your mortgage. There will probably/maybe be another .25% cut but it won't affect fixed term rates much.

[muppet]

So there was another cut of .25% again yesterday now at an all time low of 1% . Eddies Hobbs said that now was the time to fix it for 10 years what do ye think of that advice lads ?

Yea Eddie we should all fix for 10 or even 20 years even though the rate would be probably well over 6%.  Economists 18 months ago were telling us to fix as rates were going up but now those who did desperately want out.

I inquired recently about 3-5 year fixed and looking at the figures I would have been mad to come off my tracker, so I didn't.

If desperate for some insulation from interest rate rises I'd probably suggest going 50/50 fixed/variable.