Thursday, 7 February 2008

Today : ECB Decision Rate + Update

Today the ECB is expected to keep the interest steady at 4% while signaling that risk to growth is increasing.

Banks, businesses have been expressing their wish to have the ECB to lower the interest rates since too high , indeed 4% is restrictive to their view.

Such a move will exacerbate any asset bubble and could trigger bad investments on households side thus promoting "moral hazard".

Banks have shown a degree of incompetence in the past 5 years especially U.S. banks that now are beeing rescued by the Fed, the TAX payers and Sovereign Funds.

The question will be if the ECB acknowledge that the risk of a recession is greater than inflation. If so signaling to the market a rate reduction by year end. Indeed we could see a spike in prices as in 1989 since real estate and builders have set current prices at bubble level. The consequences could be disastrous for many families that have no knowledge of current economic situation and who are trusting real estate agents and medias.

If rate goes down then we might be heading to a recession by year end. Because in an environment where oil price is around 90 dollars, food prices, rent, service is all up, then deciding to slash interest rates is simply because the threat to the economy is serious...

Update: According to the ECB press conference, it seems that there are evidence that risk to growth have grown. It seems that they somehow open the door for interest rates cuts. Some market participant are predicting that we could see a rate cut as early as April with possible two further rate cut by year end bringing interest rates to 3.25%. That is the rate the 12 month Euribor will soon head too...

So the European interest rates and its economical growth won't support any more the Euro, and it's clearly shown in the intraday move :

These rates cuts will create the last rally of the housing market so materializing a peak or spike by year end. Could the same 1989 phenomenon could be witnessed in 2009? a spike and a slump?

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