WILLY NILLY
Registered User
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Can someone explain why the euribor rate is over 1% higher than the ECB rate........
What are the factors that will force these rates down?
Below is an extract from another website which indicates that if the ECB drops to say 1.5% or 1% the banks wont be able to pass on the full rtae cut due to the high euribor rate.
Is the euribor rate not effected by the ECB rate cuts?
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rates of 0.5% in the months ahead, taking ECB rates down to 1.5% by the spring.
What are the factors that will force these rates down?
Below is an extract from another website which indicates that if the ECB drops to say 1.5% or 1% the banks wont be able to pass on the full rtae cut due to the high euribor rate.
Is the euribor rate not effected by the ECB rate cuts?
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ECB WATCH
4th December 2008
ECB TO CUT RATES TO 1.5%
The European Central Bank cut rates by 0.75% to 2.5% today, bringing the total
reduction in official rates in the eurozone to 1.75% in the past two months.
reduction in official rates in the eurozone to 1.75% in the past two months.
There has been
a sea-change in ECB thinking on monetary policy since the summer, brought about by an abatement
of inflationary pressures as oil prices collapsed, and the sharp weakening of activity with the
eurozone now in the grip of a severe recession. Authorities everywhere have also now realised that
the crisis in the financial system and associated credit crunch are having a very negative impact on
economic growth. Thus, central banks across the globe are slashing interest rates.
a sea-change in ECB thinking on monetary policy since the summer, brought about by an abatement
of inflationary pressures as oil prices collapsed, and the sharp weakening of activity with the
eurozone now in the grip of a severe recession. Authorities everywhere have also now realised that
the crisis in the financial system and associated credit crunch are having a very negative impact on
economic growth. Thus, central banks across the globe are slashing interest rates.
The changed economic outlook is very evident in the latest quarterly economic forecasts
published today by the ECB.
published today by the ECB.
In September, the ECB was forecasting that the eurozone economy
would grow by 1.2% in 2009.
Three months later it has slashed
its growth forecast to -0.5%, with
a range of -1 to zero per cent. It is
also forecasting that growth will be
sluggish in 2010 at 1%.
It has also made a big reduction to
its inflation forecast. It is now
predicting that the HICP rate will
average 1.4% in 2009, compared
to the forecast made in September
of 2.6%. It sees inflation averaging 1.8% in 2010. Thus, the ECB is now forecasting a return to
price stability in the eurozone. Key factors in this regard are the collapse in oil and other
commodity prices and the recessionary economic conditions.
Indeed, even these revised economic forecasts may prove too high. The latest readings from key
leading activity indicators, in particular the PMI surveys and EC’s economic sentiment
index, are truly awful and point to a very deep recession. GDP contracted by 0.2% in both
Q2 and Q3 2008 but could be heading for a fall of 0.4-0.5% in Q4. Output is likely to continue
declining in the first two or three quarters of next year. A 1% fall in eurozone GDP could be on the
cards for 2009. Meanwhile, the continuing fall in oil prices and weakening demand and labour
market conditions suggest that inflation could fall even more than forecast by the ECB. Indeed, at
current oil prices, the HICP rate could be at 0% by next summer and average less than 1% in 2009.
would grow by 1.2% in 2009.
Three months later it has slashed
its growth forecast to -0.5%, with
a range of -1 to zero per cent. It is
also forecasting that growth will be
sluggish in 2010 at 1%.
It has also made a big reduction to
its inflation forecast. It is now
predicting that the HICP rate will
average 1.4% in 2009, compared
to the forecast made in September
of 2.6%. It sees inflation averaging 1.8% in 2010. Thus, the ECB is now forecasting a return to
price stability in the eurozone. Key factors in this regard are the collapse in oil and other
commodity prices and the recessionary economic conditions.
Indeed, even these revised economic forecasts may prove too high. The latest readings from key
leading activity indicators, in particular the PMI surveys and EC’s economic sentiment
index, are truly awful and point to a very deep recession. GDP contracted by 0.2% in both
Q2 and Q3 2008 but could be heading for a fall of 0.4-0.5% in Q4. Output is likely to continue
declining in the first two or three quarters of next year. A 1% fall in eurozone GDP could be on the
cards for 2009. Meanwhile, the continuing fall in oil prices and weakening demand and labour
market conditions suggest that inflation could fall even more than forecast by the ECB. Indeed, at
current oil prices, the HICP rate could be at 0% by next summer and average less than 1% in 2009.
With interbank rates still very high relative to official interest rates, it is quite clear that
further significant policy easing is required.
further significant policy easing is required.
Three month interbank rates are still around 3.6%
after today’s cut, which is very high in the current economic environment. Official rates need to be
cut to very low levels to help bring down interbank rates, as has happened in the US. Otherwise,
the easing of monetary policy is going to be much less effective in this downturn.
In the last cycle, ECB rates were eventually cut to a low of 2%. On that occasion, the economy
managed to avoid recession. With the economy now in deep recession, inflation falling sharply and
elevated interbank rates meaning that monetary policy is less effective in this cycle, there is a
strong case for cutting ECB rates to 1.5% if not lower in 2009. We see two further cuts in
after today’s cut, which is very high in the current economic environment. Official rates need to be
cut to very low levels to help bring down interbank rates, as has happened in the US. Otherwise,
the easing of monetary policy is going to be much less effective in this downturn.
In the last cycle, ECB rates were eventually cut to a low of 2%. On that occasion, the economy
managed to avoid recession. With the economy now in deep recession, inflation falling sharply and
elevated interbank rates meaning that monetary policy is less effective in this cycle, there is a
strong case for cutting ECB rates to 1.5% if not lower in 2009. We see two further cuts in
rates of 0.5% in the months ahead, taking ECB rates down to 1.5% by the spring.