Transcript Presentation 9

Interest Rates, ECB
and Financial Markets
Presented by:
Paul McDaid
Dominic King
Iarla Davoren
Conor O’Brien
Introduction...
• ECB and Interest rates...
• Why Financial Markets expect cut?
• What reduction is expected...
• Other options...
Interest Rates
• Set by national governments and
Central Banks…
• Governing Council of ECB set rates…
• Objective: Maintain Price Stability…
Decline of Interest Rates
• ECB Vs Bank of England
Why do Financial
Markets expect a cut?
• Trichet’s comments…
• Fall in inflation…
• Leading Eurozone indicators…
Monetary Policy
• Monetary Policy…
• Interest Rates – Key tool of Monetary
Policy…
• Expansionary Monetary Policy
Effects of lower Interest
rates
• Reduces the cost of borrowing...
• Aims to stimulate borrowing by
banks and consumers...
• Stimulate economy with
increased economic activity...
Effects of lower interest
rates
• Encourage consumption, not saving...
• Increase demand for goods and services...
• Increase investment, production and
employment...
Economic Data
• Euro-zone recession...
• Rising unemployment...
• Contracting industrial activity...
• GDP forecast to contract in 2009...
• Germany...
Inflation
Disinflation
• Inflation 1.2% in February...
• Commodity prices...
• Weakening global demand...
• Contraction in credit growth...
Monetary Data
• Contraction in M3 money supply growth...
• Credit crunch...
• Fall in loans to private sector and
households...
• Interbank Lending...
Why financial markets
expect a 50bps cut?
• Unrest in the governing council...
• 50bps cut is most likely as it would act as
compromise...
• Support of lower rates Vs Fear of lower
rates...
Why financial markets
expect a 50bps cut?
Trichet Comments (February) :
“ It would probably be more the first
figure that you have mentioned”
Why not a 1% cut?
• More options with 50bps...
• Gradual cutting over slashing...
• Don’t want to appear panicked...
• More than 50bps heading to quantitative
easing...
How the Rate Cut Affects
Financial Markets…
• Euribor...
• Weaker Euro...
• Debt...
• Volatility in stock market...
Euro vs Dollar
What next
• Further cut in interest rate…
• Liquidity Trap?
• Unconventional Monetary Policy...
 Quantitative Easing