Macro Digest: ECB will cut by 25 bps - but nothing will happen

Consensus:

 

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

·         Europe 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 SME vis-à-vis last quarter. Only exception is Germany where the number is +6%

 

ECB needs to create better "transmission" – however local regulators stops this as in Spain a minimum mortgage rate of 325 bps is in place, in the Netherlands its 300 bps minimum – on top of this banks are under capital constraint due to incoming increase demand from BIS III.

 

Solution:

 

By passing banking system through 3. Party organization: European Investment Bank et al. Issue:  Monetary policy leaves ECB – and lack of German support for it.

 

A TARP like institution backed by tax receipt – very unlikely – Germany shot down any believe in banking union only yesterday.

 

Deutsche Bank have an excellent overview of the choices and its likelihood:  Source:

 

 

Conclusion:

 

Rate: Cut by 25 bps

 

Impact: Limited. Buy the rumor / sell the fact – We see EUR.USD toppish (also due to too high expectations from FOMC today) around 1.3200/1.3250

 

Unconventional measures: ECB will "talk the talk" – but will fail to provide new impulse on this debate. SME's is important for job, but not for monetary policy despite it being 80% of all new jobs created since 2000.

 

Club Med will try to pressure Club North with increased structural funds and using EIB, but for now ECB will praise themselves for getting periphael rates down and again adding: Over to you Politicians – we have done our job – now it's up to.

 

Safe travel,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

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