It's been said that old habits die hard.And one habit likely to change is European Central Bank President Jean-Claude Trichet's penchant for delaying interest rate cuts until the last possible moment, so says economist Richard Felson.
"In this case, Trichet will be joining the Fed's rate cut party this fall," Felson told BloggingStocks. "In fact, if economic conditions continue to worsen in Europe, they may even precede the Fed with a rate cut." The ECB next meets to discuss rates on September 4; the Fed, on September 15.
The Fed, as investors / readers are aware, has paused in its rate cut cycle, after decreasing interest rates by 325 basis points, to 2% from 5.25%, in an effort to jump-start a U.S. economy dragged down by its worst housing slump in a generation. Meanwhile, the ECB has remained in restrictive monetary policy mode - - first increasing its refinance rate by a quarter-point to 4.25%, in mid-2008, then taking a stand-pat stance, citing inflation pressures.
Felson said consumer inflation pressures are real in the euro-zone and are likely to reach 3.3-3.6% in 2008, exceeding the ECB's 2% ceiling, but growth concerns are paramount. "The factor that will tip the scales is GDP growth. The fact that the euro-zone economy contracted by 0.2% in the second quarter is a real eye-opener. Trichet can no longer argue that the U.S. slowdown has not affected Europe," Felson said. "The slowdown has hit Europe's shores, and it's likely to get worse before it gets better."
Europe's GDP deemed the key
Further, Felson believes the ECB's 2008 GDP forecast of 1.6% GDP growth for the euro-zone is optimistic, arguing that "2008 growth will be closer to 1%."
Moreover, the above slow growth, combined with declining exports sales, "may even prompt the ECB to cut rates before the Fed does in the fall," Felson added. Another factor that may weigh on the ECB, in Felson's view: the euro-zone's relatively short, recent economic expansion which recorded "only two years of strong economic growth."
Economic Analysis: ECB rate cuts would certainly assist the regional and global economic recovery, but the view from here is that the ECB will not cut rates before the Fed during this economic cycle. The euro-zone's GDP would have to register another quarter of decisively-negative growth for the ECB's Trichet to turn his attention away from inflation.
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