ECB Meeting Preview: Economists Expect Rate Cut, Markets Less So

The European Central Bank is set to release its interest rate decision next week on Thursday, May 2, however, economists are already talking about a potential rate cut. No less than 10 banks have released notes in the past 24 hours calling for a rate cut, following the weaker than expected German IFO Business confidence survey and PMI release over the past two days.

Over the weekend, ECB Governing Council member and Austrian central banker Ewald Nowotny said in response to a question asking about an imminent rate cut, "It's still too early. In Europe, we have very expansionary monetary policy and it is too early to judge if further steps should be taken."

However, these comments were made before the latest round of data pointed to a continued slowdown in Europe, specifically so in the continent's economic growth engine, Germany. Now, with the latest round of data pointing to weakness in the core of Europe and not just the periphery, economists expect conservative German board member and Bundesbank chief Jens Weidmann to cave and accept a rate cut.

Other board members voiced their opinions recently as well, and these most recent comments point to a rate cut. ECB President Draghi said over the weekend that there has not been any indication of a pick-up in growth after earlier in April hinting that a rate cut could happen in May. Further, board member Joerg Asmussen said that the ECB could lower rates if the data were weak enough to warrant such action.

Here is a list of what the experts expect next Thursday:

• Morgan Stanley sees a 25 basis point cut in the benchmark rate and a 50 basis point cut to the Marginal Lending Rate (MLR) by the June meeting.


• Credit Suisse sees a 25 basis point cut next week in the benchmark rate.


• RBS sees a 25 basis point cut to the benchmark rate next week.


• UBS sees a 25 basis point cut to the benchmark rate as well as a 50 basis point cut to the MLR next week.


• Bank of America Merrill Lynch does not see a cut in May but believes that the probability of such action has increased over the past week.


• J.P. Morgan sees a 25 basis point to the benchmark rate next week.


• Barclays sees a 25 basis point cut to the benchmark rate next week.


• Comemrzbank sees a 25 basis point cut next week following the weak PMI data this week.


• Nomura sees a 25 basis point cut to the benchmark rate next week.


• Deutsche Bank sees a 25 basis point cut to the benchmark rate next week.


• Bill Gross of PIMCO says that the ECB will cut soon but a weaker euro is the only solution to helping the Eurozone, via PIMCO's twitter account.

Swaps markets are less impressed. Currency traders know that the probability of a rate cut can be extrapolated from the OIS swaps market, however the market is only pricing in approximately a 0.2 percent chance of a rate cut. However, this is subject to change over the next week and should this probability increase, it could signal that the market is beginning to price in such action.

The euro traded near flat against the dollar in early US trade after trading slightly higher throughout the morning. The single currency saw greater weakness against the pound and the Australian dollar and was also weak against the yen.