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Rate cuts Thursday in Europe

November 05, 2008 – Comments (0) | RELATED TICKERS: RDN , CIT , ABR

I doubt Shorts today having staying power today
 ahead of Rate cuts Thursday in Europe which could spark another round of short covering.

Rate cuts expected by ECB and Bank of England
By Kirsten Donovan Reuters
Published: November 4, 2008
  http://www.iht.com/articles/2008/11/04/business/ecb.php

LONDON: The sharply slowing European economy has persuaded financial markets that the European Central Bank and the Bank of England could cut interest rates by as much as three-quarters of a percentage point Thursday to contain the fallout from the global financial crisis.

Figures derived from the euro overnight index average, or Eonia, show interest rate traders almost fully pricing in a three-quarters of a percentage point cut, to 3.0 percent, by the ECB while British interest rate futures show the Bank of England cutting rates by the same amount, to 3.75 percent.

If realized, those expectations would still come as a surprise, as all 81 economists polled by Reuters last week, along with a majority of analysts, reckoned the ECB would cut its base rate by a more modest half-point from its current 3.75 percent. A cut of three-quarters of a point would be the biggest move in the history of the ECB.

The Bank of England's Monetary Policy Committee has never cut interest rates by more than a half point since it was given policy independence in 1997. It cut its main rate by a half-pont on Oct. 8, to 4.50 percent, as part of a global coordinated easing. All 62 economists polled by Reuters this week forecast at least a half point cut, though almost one-third predicted a larger cut.

"The market is salivating over what the ECB and Bank of England will do on Thursday," strategists at Calyon said in a note. "We expect 50 basis points of cuts from each central bank, but the market pricing has increased to a 75 basis point move. We are in no doubt the accompanying messages will signal more easing to come." One basis point is one-hundredth of a percentage point.

The ECB president, Jean-Claude Trichet, has convinced markets that another ECB rate cut is a done deal, having already lowered its benchmark rate by 50 basis points last month in the coordinated move by major central banks.

Trichet said last week that there was a possibility, although not a certainly, that rates would be cut at the Governing Council's meeting Thursday.

David Keeble, a Calyon strategist, said that the ECB had no need to surprise the market on Thursday as the recent sense of panic was fading. After the euro had its biggest one-month loss ever in October, Euribor interbank lending rates are easing and stock markets are basing out. "They have not signaled at all that they are going to move 75 basis points and if they do it will really unhinge expectations of futures moves," Keeble said.

Eonia futures suggest further easing by the ECB, with rates eventually seen falling to a three-year low of 2.5 percent by April.

That is in marked contrast to a few months ago when even in the face of the global credit crunch, the ECB raised rates to 4.25 percent in July, emphasizing its inflation-fighting mandate.

But the European Commission said Monday that the euro zone appeared to be in a recession and that economic growth would come to a virtual standstill next year.

With price pressures also receding - oil for example has more than halved in price to less than $70 a barrel - the central banks have some much needed wiggle room.

Charles Diebel, a strategist at Nomura International, said the ECB was not expected to have the stomach for a 75 basis point cut on Thursday, but rates could ultimately test the lows seen from 2003 to 2005. "Our longer-term view remains one where prior cycle lows will be tested, as they have in the U.S. As such we would expect a move to 2 percent from the ECB into next year and for the BoE would suggest the prior cycle low of 3.5 percent will be exceeded," Diebel said.