European currencies including the euro, British pound, and Swiss franc were hit hard on Thursday as three of the biggest central banks in the continent – the European Central Bank, the Bank of England, and Swiss National Bank – all slashed interest rates.
Here’s a brief overview of what we saw:
European Central Bank - At 7:45 ET on Thursday, the European Central Bank (ECB) cut rates in line with expectations by 50 basis points to a nearly 2-year low of 3.25 percent. As usual, comments by ECB President Jean-Claude Trichet during his 8:30 ET press conference provided greater insight into the current bias of the central bank. One thing was obvious: the ECB is now very dovish. Mr. Trichet said that the outlook for price stability has improved, though he could not rule out a sharp decline next year, suggesting that even they - previously one of the most hawkish central banks in the developed world - are concerned about the potential for deflation. Mr. Trichet also said that he would not exclude cutting rates again, and this seems quite plausible, as growth and inflation pressures are bound to decrease further. As of Thursday’s close, Credit Suisse overnight index swaps were pricing in 142 basis points worth of cuts during the next 12 months. Bank of England - At 7:00 ET on Thursday, the Bank of England (BOE) unexpectedly slashed rates by 150 basis points to bring the UK Bank Rate down to 3.00 percent, the lowest level since 1955. Indeed, a Bloomberg News poll of economists had only forecasted a 50 basis point reduction, making this move all the more shocking. Looking at the BOE Monetary Policy Committee’s (MPC) commentary released post-announcement, it is clear that the MPC is extremely concerned about not only the instability in the financial markets and persistently tight credit conditions, but also the significant downside risks to growth and perhaps most importantly, the risk that inflation will fall below their 2.0 percent target. The latest CPI figures show inflation growth at 5.2 percent in October, but given the economic slowdown and drop in commodity prices, the BOE has suggested that CPI will plummet in coming months. This echoes the rhetoric of the BOE’s most ardent dove, MPC member David Blanchflower, who said last week that deflation was a bigger concern than inflation, and that rates must be lowered “significantly” and “quickly.” As of Thursday’s close, Credit Suisse overnight index swaps were pricing in 231.5 basis points worth of cuts during the next 12 months. Swiss National Bank - Just one minute after the BOE cut rates on Thursday, the Swiss National Bank (SNB) surprisingly came in with a 50 basis point reduction to their 3-month LIBOR target rate, bringing it down to a nearly 2-year low of 2.00 percent. Since the SNB had not been scheduled to meet again until December, their rate cut indicates that this was part of a coordinated effort with the other European central banks. In a press release following the rate decision, the SNB said that they adjusted monetary policy in light of the worse-than-expected deterioration of the global economic outlook and lower inflation forecasts, given the drop in oil and appreciation of the Swiss franc. Their discussion of the currency, which they will “keep a close watch on”, suggests that they are somewhat concerned about its ascent and if these moves continue, may signal potential for a coordinated currency intervention on low-yielding currencies in coming months. Credit Suisse overnight index swaps are not updated frequently for the SNB, but I anticipate that they will follow the lead of the ECB going forward.
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