ECB July Rate Decision: Standing Pat

Discussion in 'Trading' started by Inchoate, Jul 4, 2012.

  1. Inchoate


    Spent half a day reading all I could on this upcoming decision, and have come away convinced ECB will sit pat at a refi rate of 1.0%. Reuters poll making the rounds states that 48 of 71 economists surveyed predict the ECB will lower rates by at least 0.25%.

    But a simple review of ECB statements and policy indicates a cut just wouldn't make sense. Their first and primary objective is to maintain medium-term price stability (inflation) at just below 2.0% YoY. Latest stats for May put their inflation measure at 2.4%. All this talk about supporting the economy and employment - that is a very, very secondary consideration for ECB. Price Stability is first.

    Moreover, ECB lowered to historic low 1.0% after Lehman failed and their was much uncertainty as to the nature of the global financial threat. ECB President has made clear the current 'threat' in Eurozone is understood.

    Given markets have priced in a rate cut, I'm positioning accordingly.

    You might ask, why are all of these economists getting it wrong? Well, they are largely sell-side analysts and they cater to their consituents (fund managers) who all ardently want a rate cut. It is just more marketable to advocate for a cut, though it doesn't fit with the ECB's mandate.