ECB unlikely to follow Greenspan's lead just yet

 

Analysis: The Federal Reserve cut should boost equity markets, and hopes are that European rates will also fall soon

Just when it looked like the element of surprise had disappeared from monetary policy, the US Federal Reserve has pulled off a real shocker.

The cut itself is not the remarkable part but its extent - a fall from 1.75 per cent to 1.25 per cent - is surprising. The consensus expectation was for a quarter percentage point to be cut, with possibly a further quarter to be shaved off early next year as a kind of bonus held in reserve.

Federal Reserve chairman Mr Alan Greenspan and his team of 11 colleagues chose instead to deliver what must surely be the end of their rate-cutting capacity in one go, seeking to stimulate spending, production and employment by bringing rates to their knees.

Once the initial shock subsides, further rises in already rallying stock markets on both sides of the Atlantic are probable, as investors welcome the latest attempt to tackle the listless US economy.

There is one risk weighing against this happy and sought-after scenario, however.

"The markets could get too concerned that there is nowhere else to go," said Mr Austin Hughes of IIB Bank last night.

He feared the Federal Reserve may have gone too far, scaring stocks into another retreat with its gloomy assessment of economic conditions.

The battle against economic malaise in the US has been ongoing for quite a while, with 11 interest rate cuts being delivered by the Federal Reserve last year.

The focus on interest rates has now switched firmly to Europe and, more specifically, to two key meetings in London and Frankfurt.

Both the Bank of England and the European Central Bank (ECB) meet today to consider monetary policy and both are thought to be leaning towards a rate cut, if not now, then soon. If and when this occurs, domestic mortgage rates in the Republic could be expected to follow almost immediately, according to past habits.

The ECB has given nothing away on how its Governing Council is thinking, a probable signal that a cut is not on the way this month, despite the ongoing woes of the euro-zone economy. The example set by the Federal Reserve last night, however, puts more pressure on the ECB.

Some observers predicted this week that the ECB could be ready to cut rates now after an early warning was issued to Portugal for breaching the 3 per cent ceiling on budget deficits.

Mr Robbie Kelleher, chief economist at Davy, is confident the ECB will move sooner rather than later. He believes the Bank could follow with its rate cut today. If this is the case, mortgage holders could see their repayments fall next week.

Goodbody chief economist Mr Colin Hunt is sceptical however, not expecting a cut before next year, despite what he calls the "pressing need".