guest commentary

ECB to Enter Zero Interest Rates Policy (ZIRP)?

Monday, 12 January 2009 12:00:16 GMT  |  David Song, Currency Analyst, Geng Chen, DailyFX Research

A zero refi rate is not the most likely scenario … Several major central banks, including the Federal Reserve, the Bank of Japan and the Swiss National Bank, have already embarked on a (near) zero interest rates policy (ZIRP) (see “The Fed Lady Sings”, The Global Monetary Analyst, December 17, 2008). While we would not categorically rule out that the ECB could also be forced to resort to such extreme measures, we don’t believe that ZIRP is the most likely scenario for the official refi rate.

Weekly Bank Research Center 01-12-09

 

ECB to Enter ZIRP?

 

Stephen Roach, Head Economist, Morgan Stanley

A zero refi rate is not the most likely scenario … Several major central banks, including the Federal Reserve, the Bank of Japan and the Swiss National Bank, have already embarked on a (near) zero interest rates policy (ZIRP) (see “The Fed Lady Sings”, The Global Monetary Analyst, December 17, 2008). While we would not categorically rule out that the ECB could also be forced to resort to such extreme measures, we don’t believe that ZIRP is the most likely scenario for the official refi rate. It is, however, possible for the overnight rate (EONIA – the Euro OverNight Index Average, which is the weighted average of overnight Euro Interbank Offer Rates for interbank loans), depending on market conditions. We forecast further rates cuts of 150bp in the next few months, which would bring the refi rate down to a new historical low of 1% by the spring. This marks a downward revision of half a percentage point compared to our previous profile (see Testing Times, December 3, 2008), reflecting another downgrade to our near-term growth and inflation forecasts. We now expect euro area GDP to contract by 1.6% and HICP inflation to fall to just 1.1% this year (for more details, see European Economic Chartbook: Lowering Growth, Inflation and Interest Rates Forecasts, January 7, 2009). Given that the ECB announced in late December that the corridor around the refi rate will be widened back to 100bp from January 21, a 1% refi rate implies that the floor for the overnight rate would hit the zero threshold.

 

Full Story

 

 

Looking into the Crystal Ball

Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank

How will a shift in global economic conditions affect FX markets? What will be the likely implications of a sharp recovery in stock markets and how likely is an equity rally? What will it take for carry trades to come back into fashion and will 2009 be a great carry year? Will credit risk conditions normalise and how will this affect FX markets? Are the major central banks likely to intervene in one or several major currency crosses in 2009 and at what levels would they possibly do so? We are facing a flurry of questions, and the answers are not straightforward. Nonetheless, in the past week, we have ventured a guess at things to watch in the new year.

 

Full Story

 

 

No, 2008 Wasn't Just A Bad Dream

E. Silvia, Ph.D. Chief Economist, Wachovia

This week brought a whole host of reports confirming the fourth quarter was every bit as bad as advertised. Reports earlier in the week showed manufacturing activity continuing to contract in December and factory orders were exceptionally weak in the three months ended in November. Employment conditions also continued to worsen, with nonfarm employment falling by 524,000 jobs. December's job losses were extremely widespread and brought the total loss over the past five months to over two million jobs. A total of over 2.5 million jobs have been lost since the recession began a little over a year ago. While the bulk of those earlier losses were in manufacturing and in housing-related industries, job losses have broadened and intensified.

 

Full Story

 

Fiscal Stimulus Just Around the Corner…

Steve Chan, Economist, TD Bank Financial Group

Talk of fiscal stimulus rose to a feverish pitch on both sides of the border this week. In Canada, Finance Minister Flaherty on a cross country tour for pre-budget consultations gave hints that the government’s January 27th budget would include both tax-cuts and increased infrastructure spending. But it won’t come free. As the Finance Minister recognized, the Canadian budget deficit will be substantial. TD Economics estimates that even without the fiscal stimulus, the budget deficit in 2009 would be over $10 billion. With increased spending it will more than likely surpass $20 billion. In the U.S., President-Elect Obama stressed the need for substantial fiscal stimulus, suggesting that without it, the unemployment rate would sore to double digit levels and the economy would miss its potential by over onetrillion dollars. The trillion dollar figure was popping up all over the place this week. Earlier in the week the Congressional Budget Office (CBO) released its estimates of the potential budget shortfall for the U.S. Federal Government – putting the deficit at $1.2 trillion in 2009. Obama’s plan, the "American Recovery and Reinvestment Plan," takes-over where 2008's "Economic Stimulus Act," left off and will likely approach over $700 billion in total spending. This, on top of the already projected deficit, will make a trillion dollar deficit look like the good old days.

 

Full Story

 

2008 Was a Year of Shock and Awe for the World Economy

Trevor Williams, Chief Economist at Lloyds TSB Financial Markets

2008 has been a year full of tumultuous events for financial markets, with the failure of some of the brightest names in the banking sector and wholesale government rescues being mounted for most of the rest. Low financial market volatility, a feature of the last seven years, turned into one of the highest periods of volatility ever experienced in some markets. The boom in the world economy has come to an abrupt end and now seems a distant memory. But at the start of the year, there was some optimism that while economic growth would slow, outright recession would be avoided. Now, the world economy faces the worst recession since the 1980s. Inflation was not seen as a major problem at the start of 2008, but by the end of the year deflation and disinflation were the main concern.

 

Full Story

 

Other Pre-screened Independent Contributors

J-Chart

J-Chart is an innovative charting and bias-neutral market analysis tool. Based on its proprietary theoretical concept and display of market price action, J-Chart provides a much clearer and unique insight into the market than conventional charting methods. This innovative charting and market analysis tool is designed to visualize market price action that constructs unique price patterns called "Equilibriums". Based on its "non-fixed time frame" concept and "Kinetic Equilibrium" application, J-Chart users are able to forecast markets' future movements with high accuracy.

 

J-Chart Weekly Newsletter

Compiled by: David Song, Currency Analyst and Geng Chen, Dailyfx.com

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars