# why are the ecb under pressure to cut rates?



## z106 (26 Jan 2008)

Ok - just ro explain my positon - i am a lay man when it comes to the markets.

But - goimg what i've learned recently,the feds has job has 2 pyurposes:
1) keep inflation low
2) keep the markets in good shape

Hovever - i've read the ecb has only one mandate i.e. keep inflation low.

So - my question is this:
Obviously the ecb seems under pressure to cut rates given what happened during the week.

But why?

If really the ecbs job is to keep inflation low then they obviously shoukd't dream of cuttin rates.(given euro inflation)

So - is this mandate just a joke in practice or what?

like - if u went by the book then obviously the ecb would be under zero pressure to cut rates - if anything they should be increasing.


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## Afuera (26 Jan 2008)

qwertyuiop said:


> Obviously the ecb seems under pressure to cut rates given what happened during the week.
> 
> But why?


By and large the pressure being put on the ECB to cut is coming from external sources such as politicians, the financial markets, banks, etc. While it may look like there is a lot of pressure on them in the media the ECB is not answerable to any of these people. The markets, in screaming for these rate cuts, are showing that they are fearful for future prospects.



qwertyuiop said:


> So - is this mandate just a joke in practice or what?
> 
> like - if u went by the book then obviously the ecb would be under zero pressure to cut rates - if anything they should be increasing.


If they cut due to pressure being put on them then yes it will mean their mandate is a joke. The repercussions if they bend to the pressure would mean they lose all credibility which would be very damaging for such a recent and largely untested currency.


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## z104 (26 Jan 2008)

Are the ECB really just rubber stampers to the markets whims anyway. Eventually they do what the market wants and the market wants a rate cut.

I reckon we will see a .25 rate cut in March and another .25 by September.
That's just my opinion.


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## Afuera (26 Jan 2008)

Niallers said:


> Are the ECB really just rubber stampers to the markets whims anyway. Eventually they do what the market wants and the market wants a rate cut.


Don't confuse the Fed with the ECB. The latter have no precedent of doing what you describe... yet anyway. The next few months will reveal how credible they really are.


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## Thomas22 (26 Jan 2008)

Afuera said:


> Don't confuse the Fed with the ECB. The latter have no precedent of doing what you describe... yet anyway. The next few months will reveal how credible they really are.





I think Trichet is very determined to show just how credible they are.
Markets are expecting a cut but I wouldn't be surprised if they raised them.


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## aamstudent (28 Jan 2008)

Afuera said:


> Don't confuse the Fed with the ECB. The latter have no precedent of doing what you describe... yet anyway. The next few months will reveal how credible they really are.



There was an interesting article in the economist on Jan 3 which suggests that there actually has been a precedent.  The article can be found at 
and the final paragraph sums it up - 
"The lesson of 2001 is that when the outlook for the economy appears bad enough, the ECB will cut interest rates, even if inflation is stubbornly high. Already, two other inflation-targeting central banks—in Britain and Canada—have followed the Fed's lead. If the banking crisis persists, the ECB may have to do likewise."

It would appears that we don't have too many certainties any more!


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## Marie (28 Jan 2008)

The Bank of England Monetary Policy Committee is an independent agency.  Recent interest-rate cuts are not in response to the Fed movements but are (theoretically and as far as it is possible to be objective!) based on the current state of the British economy.


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## coola (29 Jan 2008)

they will of course follow the US. a call from mr bernanke and its a done deal


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## z109 (29 Jan 2008)

coola said:


> they will of course follow the US. a call from mr bernanke and its a done deal



Thank you coola, your posts brighten up my day.


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## ivuernis (29 Jan 2008)

coola said:


> they will of course follow the US. a call from mr bernanke and its a done deal



"Helicopter" Ben doesn't need to call them at all. If the Fed drops the rate enough the ECB will follow suit at some stage. It would be a break from observed rate patterns if the ECB left rates unchanged (or hiked them) while the  Fed is lowering them. The ECB have always followed the same direction of the Fed's rate after a period.


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## z109 (29 Jan 2008)

ivuernis said:


> "Helicopter" Ben doesn't need to call them at all. If the Fed drops the rate enough the ECB will follow suit at some stage. It would be a break from observed rate patterns if the ECB left rates unchanged (or hiked them) while the  Fed is lowering them. The ECB have always followed the same direction of the Fed's rate after a period.


always = 8 years

You'll forgive me if I say that that is too short a time period to be so definitive.


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## ivuernis (29 Jan 2008)

yoganmahew said:


> always = 8 years
> You'll forgive me if I say that that is too short a time period to be so definitive.



Didn't say it was definitive, just on past perfomance (over the last 8 years) the ECB has always followed the Fed's rate direction (be that up or down). I don't think it will be any different this time and it'll depend on how far the south the Fed are going with their current rate cuts. Maybe it'll be different this time?


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## z109 (29 Jan 2008)

ivuernis said:


> Didn't say it was definitive, just on past perfomance (over the last 8 years) the ECB has always followed the Fed's rate direction (be that up or down). I don't think it will be any different this time and it'll depend on how far the south the Fed are going with their current rate cuts. Maybe it'll be different this time?


'always' is quite a definitive term.
'so far' or 'for all its short existence' would imply some possibility of a different course of action.


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