ECB may follow Fed and BoE in rate cut
Daily Telegraph 9.2.08 by Ambrose Evans-Pritchard
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The European Central Bank has ditched its bias towards interest rate rises, preparing to join the US Federal Reserve and the Bank of England in easing monetary policy to head off a sharp downturn.
Jean-Claude Trichet, the ECB's president, acknowledged that risks are now largely on the "downside" after January's precipitous fall in Italy and Spain's services index.
"It is a total capitulation," said Jacques Cailloux, eurozone economist at the Royal Bank of Scotland.
"The ECB was wrong in thinking that Europe could decouple from the US and has misjudged the loss of momentum. We think they will start cutting rates in April," he said.
Ken Wattret, an economist at BNP Paribas, said cuts could come as soon as March, warning of a "vicious spiral" as the credit squeeze and sliding confidence feed on each other.
The euro plummeted to $1.4450 against the dollar as Mr Trichet's comments flashed across traders' screens. Funds have taken massive 'short' positions, betting that the euro's six-year march to record highs is over.
The ECB has held rates at 4pc since the summer, standing aloof as the Fed rushed through emergency cuts. A chorus of critics have accused the bank of complacency bordering on hubris given that credit rationing has raised borrowing costs for households and businesses in the eurozone by 100 basis points.
France's OFCE institute said the bank risked plunging the eurozone into a deep economic slump by keeping policy too tight for too long.
Mr Trichet has had to navigate a delicate course between two opposed blocs of ECB governors from North and South. A German-led group has been pushing for rate rises, afraid of a wage-price spiral after inflation reached 3.2pc in December. Germany's Verdi service trade union is calling for an 8pc pay rise this year.
The Latin bloc has starkly different needs as the housing booms subside. It appears that the doves have finally managed to impose their collective will. They may have been helped by the IMF's decision to downgrade its eurozone growth forecast to 1.6pc for 2008.
Erik Nielsen, Europe economist at Goldman Sachs, said the investors were getting ahead of themselves. "The markets have got this all wrong. Growth is not slowing enough for the ECB to hit the panic button," he said.
"It bothers a lot of ECB council members that they have never met their 2pc inflation target in eight years. Is there any other profession where you can miss your target for eight years and still be credible? They're going to keep rates on hold. If they cut, I'm going to be buying inflation protection," he said.
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