ECB does not conduct back-to-back rate cut but lowers inflation outlook
The European Central Bank showed its reluctance to act now and improve inflation in the Euro Zone, despite forecasting prolonged below-target inflation and a weak recovery for the next two years.
The ECB’s latest economic projections, published on Thursday after the governing council kept interest rates on hold, are for inflation at 1.1% in 2014 and 1.3% the year after. The region’s economy was expected to expand just 1.1% next year and 1.5% in 2015, and this is after two years of contraction.
Mario Draghi said the council believed there was little chance that the Euro Zone would step into the Japanese scenario, adding that November’s quarter-point rate cut was protection against any such risk. Draghi reiterated that the ECB stood ready to act and has various powerful tools.
What offered the Euro some relief was that Mario Draghi revealed that the council had a “brief” discussion about the technicalities of lowering the central bank’s deposit rate below zero, easing the earlier expectation that they would do it as early as this month. He also suggested that the ECB was studying a new framework for channelling liquidity to Euro Zone banks that would make it conditional on lending to companies. Is it Outright Monetary Transactions (OMT)?
Any offer of cheap loans through the ECB’s longer-term refinancing operations would need to target lending to smaller businesses in the periphery, which face higher borrowing costs than their counterparts in the core. He indirectly confessed that previous long-term refinancing operations (LTRO) may not have any significant impact on the real economy.
U.S. growth in the third quarter was revised up from an annualised rate of 2.8% to 3.6% in another bit of good economic news, which increases chances of an early slowing in Federal Reserve (Fed) asset purchases.
However, the main cause of the revision was a larger increase in business inventories than previously thought – they contributed 1.7 percentage points of total growth – so the pace of expansion seems unlikely sustainable.
Traders will pay attention to the Non-Farm Payroll (NFP) data tonight. If the figure stays above 200K, I see a 50% chance for the Fed to taper this month.
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U.S. Non Farm Payroll
I expect figures to come in at 215K.
U.S. Unemployment Rate
I expect figures to come in at 7.2%.
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