Forex Flash: ECB expected to cut rates and to implement ZIRP next week - BBH

Share | (Córdoba) - The ECB meets next Thursday, July 5 and even though "a few members wanted to cut rates earlier this month, they did not represent a majority", says Marc Chandler, Global Head of Currency Strategy at BBH. "Expectations are running high for some action next week".

"The ECB did announce last week a relaxation of collateral standards and a liberalization of criteria. We have suggested this should be understood as just as important, if not more so, than a rate cut itself", says the analyst. "Given financial crisis, access to credit is critical and, within reason, is important than the price (or interest rate)".

"We expect the ECB to cut the refi rate 25 bp next week", he adds. "At the same time, it will reduce the deposit rate to zero. Until recently, there seemed to be a reluctance to cut the deposit rate, which is the rate that the ECB pays to banks on their reserve holdings. However, as the crisis deepened, a few officials have intimated that is not longer the obstacle it once may have been".

On the other hand, BBH analysts think it is unlikely the ECB announces another LTRO or the resumption of the bank's sovereign bond support program ( SMP ), as "the overwhelming majority of the ECB are concerned that in the current context, ECB bond purchases would blur the distinction of monetary and fiscal policy", says Chandler.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

Referenced Stocks: SMP

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