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ECB Mersch: Large Interest Rate Cuts Could be Counterproductive (Update)
Friday, 21 November 2008 06:19:09 GMT  |  DailyFX Research
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ECB Mersch says large interest rate cuts could be counterproductive, and says that price falls are possible for a few months, but does not see deflation and that the price declines are not a deflation signal. Mersch also says he is not optimistic about Q4 Euro-Zone growth, with the speed and amplitude of the slowdown unexpected. He hopes for a return to near potential growth by the end of 2009. Comments support our view that the ECB will not follow the SNB's lead and cut rates by 100 bp at the next council meeting. They also tie in with other ECB comments stressing that some months of falling prices are not deflation, which come ahead of November inflation data, which are likely to show a very sharp deceleration in the headline rate due to lower oil prices. The headline rate is coming down so far that negative rates next year are indeed looking very likely. We agree though that this doesn't necessarily mean deflation risks, as much will be due to base effects and any drop is likely to be temporary.

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