Euro Traders Prepare for Interest Rate Cut

The European Central Bank meets on December 4 to discuss its next move regarding interest rates. Traders are anticipating a cut, but recent comments by ECB officials are making it difficult to decipher how aggressive the cut will be. Last week ECB President Trichet hinted that growth will be substantially lower in 2009.

 

The European Central Bank meets on December 4 to discuss its next move regarding interest rates. Traders are anticipating a cut, but recent comments by ECB officials are making it difficult to decipher how aggressive the cut will be. Last week ECB President Trichet hinted that growth will be substantially lower in 2009. This comment gave traders an indication that rates would indeed be cut, but offered no clues as to how much. A short time later ECB council member Nowotny warned that the ECB should be cautious when voting on the next rate cut. He implied that there was still time and plenty of economic data to sift through before making a decision. Finally late last week ECB council member Weber said there was plenty of room for rate cuts.
 
Although these three opinions are offering different views on the state of the Euro Zone economy, the consensus seems to be leaning toward a rate cut. Financial market traders are pricing in a minimum 50 basis point cut. The Euro market, however, may be looking for something more aggressive to keep pace with the Fed and the Bank of England. It will be interesting to see if the rest of the ECB members vote to side with Nowotny or with Weber. The market will have the final say however. Anything less than an aggressive cut could put pressure on the Euro as traders will begin to lose confidence that the Euro Zone will be able to pull out of its recession quickly.