ECB rate decision: Commentary

The European Central Bank has decided to cut its interest rate by 25bp to 1.25% instead of the 50bp rate cut expected. This has bullish implications for the euro and bearish implications for European stocks. As a matter of fact, we saw the EUR/USD spike higher after the rate decision and at one point tested the resistance at 1.35. European stock markets also gave back some of its previous gains, but not much.

It was clear that the ECB fell short of expectations. However, the story does not end there. As analysts know so well by know, the Trichet press conference that follows the decision could be as important or more important than the decision itself. And that was the case today.

While the decision itself fell short of expectations, the Trichet statements clearly made up for lost ground. Trichet stated that the decision was by consensus and not unanimous. By all likelihood, bigger rate cuts were debated among members of the monetary policy committee. No quantitative measures were expected and none were announced. However, Trichet makes up for it by clearly indicating that any decision to apply non-standard measures will be made in the next meeting. He also affirmed that further rate cuts could be applied.

These statements should please the markets or at least meet expectations. The ECB monetary policy will continue to be on the “easing” side although perhaps too gradually for some. Trichet did not hesitate to point out that the ECB has lowered rates by 300bp since October 2008. The change of policy did not start as early as in the U.S. and many now believe that the ECB is playing catch-up.

With one event risk out of the way, stocks resume the rally that was in place since early March. The Euro/Usd should maintain the price range of 1.30-1.35… for now.