This morning has been about waiting for the inevitable BOE `unchanged` decision, and the less certain ECB announcement. If you take the percentage chance of a cut by the ECB, as judged by the predictions of market analysts (and not just on this site), this number has reduced over the past couple of days to probably less than 10%. I think the reasons for this analysis have been very well covered here, and I think it is still valid.
If a cut is deemed necessary, either today or in the future, policy options then available start to look a bit ragged. I think the ECB want to believe that there is simply not enough evidence at the moment, to definitively identify deflation as `likely` – that may be denial on their part, but there are certainly enough conflicting views around, to make that uncertainty valid. As I have argued, I am not convinced that from these historically low levels, further cuts in interest rates (should they be called for) are valid as an effective policy tool, but what else can be done if action is deemed necessary? The alternative `Troika` response team of LTRO`s, negative interest rates and QE look respectively like: probable but inadequate, risky, and illegal. Should the threat of deflation become generally accepted as the `clear and present danger` to the European economy, the weaponry to counter it is non-proven at best, and certainly not guaranteed to work. We hopefully have some way to go before we declare that deflation is absolutely the focus, and even then, that the threat of deflation in Europe is really going to be the curse that it turned into in Japan; and there are things that could change to make that threat less obvious.
If – and when – interest rates elsewhere in the world start to firm up, and the clear favourite to start that process is the US, then a favour could be done to the eurozone, by putting in place a framework for a weaker euro. This would help a lot (depending on the size of the fall), and I would be surprised if this helpful pre-emptive measure isn`t encouraged should the eurozone economy continue to exhibit a trend of falling inflation. Germany could also help by boosting its economic demand structure.
So to quote the fabulous UK comedy `Yes Minister`, a rate cut today would be `a brave decision minister`- normally something to be avoided at all costs! The ECB would surely not want themselves accused of such a thing??
