Last Friday I modestly called the disinflation phenomena "Probably the most important story of the week".
That post followed "Spectre of destructive deflation looms over eurozone: analysts" and "So, If Draghi Is Forced to Cut Interest Rates What Do Precious Metals Do?":
Big banks predict Eurozone rate cut as Draghi runs out of options...What I'm trying to say is: this should not have been a surprise and yet something like 65 out of 70 analysts were caught wrong-footed.
You know the drill. Rate cut=weaker euro/stronger dollar=lower precious metals....
Here they are chatting about the implications. From FT Alphaville:
ECB rate cut: the analyst reaction
The EBC cut rates unexpectedly on Thursday. While there was market consensus that easing was coming, there was little agreement on the form in which the easing would take place. A cut was seen as stifling the ECB’s future flexibility by taking it to the lower bound and flirting dangerously with negative rates, while further LTROs were seen as potentially constrained by AQR-related stigma.See also this morning's "The ECB cuts…".
But the big news from Draghi’s press conference, however, is that the ECB is clearly not afraid of the former, and not necessarily scared of the latter either.
The ECB ended up cutting the main refinancing rate by 25 basis points, whilst reconfirming its commitment to fixed-rate tender full allotment in its MROs and special term refinancing operations, and its three-month LTROs.
The analyst community immediately picked up on the implications for euro cross rates. From HSBC (our emphasis):
The ECB’s surprise decision to lower interest rates will weaken the EUR, and this most likely is exactly what the central bank wants. Net exports have been the major driver of GDP growth over recent quarters, and the rise in EUR was increasingly threatening this engine of growth. Meanwhile, a lower EUR will also help push up inflation through higher import costs. The ECB will hope this double-whammy of the exchange rate effect on growth and inflation will help curtail the deflation threat. As we noted in our recent report “EUR strength demands a response”, the Fed worries about long-term interest rates and the BoE recognises short-term interest rates have the greatest UK economic impact. But the ECB’s most potent economic tool to help growth and fight the deflation threat, especially with rates so close to zero, is the exchange rate. Today’s easing marks the first overt step in massaging the EUR lower. It certainly will not be the last.Citi noted the ECB’s readiness to experiment with negative deposit rates as well...MUCH MORE
A couple weeks ago JP Morgan said the ECB's rate should be negative 0.75% and I've heard some analysis pointing to a negative 2% requirement.
This is serious stuff and worth serious money to folks who understand what is going on.
And again, this should not have been a surprise to analysts who get paid to not be surprised.
Previously:
UPDATED--Flash estimate: Euro area annual inflation down to 0.7 %See also "Help, I May Be Having A Stroke" for the link to Izabella's "How I learned to stop worrying and love (eurozone) deflation?"
UPDATED--"Spectre of destructive deflation looms over eurozone: analysts"
FT Editorial: "Europe’s flirtation with deflation"
