Thursday, December 4, 2008

ECB cut - late but welcome

The ECB cut rates by 75 bps to 2.5 from 3.25. The market was expected only a 50 bps cut, but there is only so much bad news an inflation fighting central banker can take. This is the same central bank that was raising rates in the summer because of the inflation from the commodity demand bubble.

The EU has been hit with bad new every day. Forecasters have never been ahead of the curve in predicting the European economy in this cycle. They were even behind the curve with the rate cut prediction.

So what has been the immediate reaction in the markets. Nothing. Bonds have sold off but not significantly. Short rates are unchanged after a rocky start. Stocks are still off for the day. This is not supposed to happen when you have a surprise cut bigger than expected. The focus may have been more on the words of ECB chairman Trichet, the EU economy would be "dampened for a prolonged period of time" and the "level of uncertainty is exceptionally high". This will throw a wet blanket on any positive response to the rate cut.

It seems that the markets do not care about the rate level anymore. It is credit availability 24/7 that counts. We are all new monetarists who only care about the amount of money being pushed through the financial system

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