What Will Draghi Say About Future Rate Cuts?

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To virtually no one’s surprise, the European Central Bank (ECB) this morning announced that it will leave its key interest rate unchanged at a record low of 0.75%. Now everyone will wait to hear what ECB chief Mario Draghi has to say about the rate announcement.

Yesterday Draghi spread a bit more doom and gloom over Germany when he said the country, which has so far remained above a lot of the eurozone’s financial problems, is beginning to be affected by the crisis.

Also yesterday, the European Commission (EC) chopped its eurozone growth forecast to just 0.1% for 2013. Only six months ago the EC was forecasting growth of 1.4%. For 2012, the EC expects eurozone GDP to contract by 0.4%.

Eurozone inflation is currently running about half a point above the ECB’s target rate of 2%, which makes it difficult for the bank to cut interest rates further. Unlike the U.S. Federal Reserve, the ECB’s single mandate is price control, aka inflation.

Draghi’s press conference later this morning will be scrutinized for any hint that a rate cut is coming, perhaps early next year. He is likely to say that the inflation forecast for 2013 is at 2% or less, setting the table for a rate cut early next year.

Paul Ausick

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