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Thursday, May 2, 2013

Bets on Rate Cut By ECB Today High

The ECB decision on rates is due this afternoon and Mario Draghi, ECB President, will hold a conference less than an hour later.

Draghi had said on April 4th that he would be ready to act should Europe's economic outlook worsen.
 
Since then inflation has plunged to 1.2%, economic confidence is down and unemployment rates in the Euro region have risen. As a result, the majority of economists today expect that the ECB will cut its benchmark rate by a quarter-point to 0.5%, a new record low.

Even so, Draghi has expressed doubts about the effectiveness of further cuts and an ECB board member last week had said that there are limits to what the ECB can do.

Other options open to the ECB include long-term loans, corporate-bond purchases and forward guidance on interest rates. None of these are bullet proof though.

The ECB has been exploring ways to stimulate lending to small- and medium-sized businesses. These types of businesses account for about half of all jobs in Spain and Italy. Lending could involve the European Investment Bank or the European Commission.

Financial markets have focused expectations on a drop in the rates. With pressure on the ECB to act decisively, should no rate cut occur the market will be disappointed. Any rate cut though will it seems, merely, in effect, be a cosmetic manoeuvre.
 
The Euro earlier inched down 0.1% to $1.3174 ahead of the ECB decision.

On Wednesday the Federal Reserve pledged to keep purchasing bonds at a rate of $85 billion a month. The Fed also confirmed that it is ready to raise or lower the level of purchases as economic conditions evolve.

After today, the market's focus will turn to the closely watched U.S. jobs data which is due out on Friday.

Reports released on Wednesday had shown that Employment in the U.S. had slowed in April. This naturally is pointing to the risk of a soft reading on jobs data tomorrow.

Against the Yen, the Dollar dropped by 0.1% to 97.36 Yen earlier today, still below a four-year high of 99.95 Yen set last month.

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