Courtesy of Mish.
Eurozone inflation collapsed to 1.2% in the latest report, from an expected print of 1.6%. Given the ECB has an inflation target of 2%, rate cut calls range all the way from a cut of 25 basis points to a cut of 75 basis points.
With the current rate at .75%, a 75 basis point to 0% is very unlikely. A cut of 25 or 50 basis points is almost certain but even 50 basis points won’t do much good.
Steen Jakobsen, chief economist at Saxo Bank writes via email:
Calls for cut in ECB rate by 25 bps from 75 bps to 50 bps. We see 25 bps
Background:
Inflation have dropped to +1.2% against at target of +/- 2.0%
Unemployment rate now at 12.1% in Europe (A record high)
Survey data again going south
Data been weaker into the meeting
European GDP is looking like -1.5 / 2.0% right now without ‘some miracle’ or stimulus help.Issues:
Monetary policy is impotent at zero bound. 25 bps plus or minus will not change the banks appetite for risk – ECB latest lending report says that in excess of 30% of banks see less appetite for lending to SMEs [Small to Medium Enterprises] vis-à-vis last quarter. Only exception is Germany where the number is +6%
ECB needs to create better “transmission” – however local regulators prevent this as Spain has a minimum mortgage rate of 325 bps is in place and the Netherlands a 300 bps minimum. Moreover, banks are under capital constraint due to incoming increase demand from BIS III.
A TARP-like institution backed by tax receipt is very unlikely as Germany again shot down any belief in banking union only yesterday.
Investors Fooling Themselves…
